Scott Brown, a market research analyst for the Food and Agricultural Policy Research Institute (FAPRI) in Columbia, brought 32 graphs on past and present market trends as a guide to what will happen next.
"In the general economic outlook we see signs the situation is getting better," Brown said. "I hope they're right. Getting the economy turned around spells a bright future for you."
Stress points on
Market conditions have been "dreadful," Brown said. The old axiom that one could always count on death, taxes and a 3 percent growth in the poultry business has been shattered. Demand for poultry, pork and beef have all been down dramatically. The dairy industry has seen the worst conditions on record, Brown said.
Brown showed one graph he called the "baloney index," which showed that demand had dropped so far that people were not buying choice cuts even at lower prices. Instead, the public has been buying the lowest quality cuts of meat, leaving a real quandary for producers.
"I'm not sure price and quality doesn't rule in the long run," Brown said.
With demand having dropped in the United States since 2004, the only saving grace in the 2008 market was foreign exports. Brown showed foreign markets had recovered enough to sustain the beef industry, but he did not expect that trend would continue as well through 2009.
Among the positive signs, production has dropped with the fall of demand, meaning that prices should start picking up again. Beef production had grown faster than population up to the real drop-off in 2008. Cow inventories are now at their lowest levels in decades.
The drop in demand coupled with higher corn prices contributed to the current situation. A boost in consumer confidence, Brown said, would be key to any meaningful recovery.
However, Brown warned that an economic upswing might be accompanied by upward movement in oil prices, which would keep prices up for corn, thus fueling the ethanol demand. Brown downplayed ethanol's role in the spike in corn prices, pointing out that overseas demand, particularly from China, came at the same time.
Despite predictions, Brown said it's still too early to tell where this year's corn harvest will end up. If corn production shrinks, heavier weight animals will be worth more.
Brown was not sure what turned the last cycle of low demand for meat products around from a low point in 1998. A number of bright spots were surfacing in the economic outlook but not an overall upward trend yet. The weakened U.S. dollar abroad meant more beef sales. Sales of offal products such as leather are up. Choice steer prices have shown gains over the break even point from cattle feed lots in the south plains states. Feeder steer prices are expected to be higher in 2010.
Country of origin labeling issues
As for competition, Brown said Canadians are continuing to get out of the cattle business and fewer Mexican cattle are coming across the border. Some of the Mexican decline was attributed to added costs from the country of origin labeling. Brown pointed out growth in the Mexican economy will boost demand in the long run, benefiting American producers.
Brown challenged concerns about country of origin labeling by pointing to the Korean market. Korean consumers can trace their beef back to the farm where it was raised. Brown said the American system has a long way to go to develop that kind of tracking to be able to play in the Korean market, whether it's a small niche market or a major player.
According to a stoplight analogy chart Brown used, red lights for the beef, pork and poultry industries are expected to turn to green in the 2010 to 2013 period. Export demand is seen as very solid for the beef industry. Supplies are expected to continue declining while domestic demand picks up again.
Role of bankers
Bob Markovics, from UMB Bank in Monett, talked about the role of bankers in making good loans. He said bankers look at a number of documents to verify loans can be paid back. Tax returns, business or personal, are not enough to see the big picture.
According to Markovics, 50 percent of credit reports have errors. Many have information mixed from people with similar names. He advised checking credit reports every year at tax time.
Personal financial statements, which are needed by bankers to cross reference assets and obligations, are very hard to fill out, Markovics said. Individuals may be charged with fraud for grossly misrepresenting net worth.
"The better we know you, the better we can service you." Markovics said. "We try to guide customers when they should and should not get loans."
|Markovics showed how a customer's financial records are analyzed. A debt service coverage equation is calculated, and if it is lower than 1.2, the customer's ability to pay the debt becomes questionable.||"Will the borrower be in trouble if we make the loan? If the borrow gets in trouble, can we work through it together?" Markovics said. "As a banker, we need to protect you from falling into the trap. We don't want you to fail."|
Collateral in agriculture is more stable than a lot of other holdings in this market, Markovics said. Looking ahead, he encourages bankers to know ag markets, just as cattlemen should pay attention to financing sources like the Federal Reserve Bank.
Markovics said there are clear indicators that interest rates may rise in the near term. He advised clients not to have certificates of deposit longer than six months at the present time, because in the next six month cycle earnings should be greater with an interest upswing.