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FAPRI analyst sees risks, opportunity in ag outlook

Wednesday, September 7, 2011

Weather conditions have created a strained environment for agriculture, but farm income is still expected to hit record levels in 2011, according to Scott Brown, an analyst with the Food and Agriculture Policy Institute (FAPRI).

"That catches people by surprise," said Brown. "It distributed very differently than we thought of in the past. If you're a crop producer today that gets a decent crop in the bin, things look very good. If you were flooded out or had drought, it's not as good a year. It may depend on what crop you had in place."

The projected yield from the corn crop appears to be tightening. The U.S. Department of Agriculture has anticipated 153 bushels an acre. Private groups are now expecting 147 bushels. In either case, Brown said the volume will determine demand.

Generally, prices will rise until demand backs off. For livestock producers, Brown said that is not good news.

"From the livestock perspective, cost has been the major issue," Brown said. "We're starting to see recovery in meat demand in the economic recovery here and around the world. We're going to have to push record meat and livestock prices to address feed costs. Weaker demand won't help that."

It had been thought that record livestock prices would bring record profits. Brown said with commodities like fertilizer and feed at record prices as well, profits are only running in the lower 25 percent, offsetting much of the projected gains.

The opportunities arise in part from others facing worse conditions. Dry conditions in Texas and Oklahoma are causing cattlemen there to lose cows at a record rate.

"The question becomes if we're going to be short on calves, what are feedlots willing to pay to stay reasonably stocked in an era of record feed costs?" Brown said. "For Missouri producers who have been able to hold on to cows, they may see some record calf prices, depending on feed costs. There is a chance to see calf prices bid higher."

The decision on what to do next, Brown said, will hinge on how much debt a cattleman can handle. Those who cannot handle much cash flow risk will not be able to act. Those who can handle more risk may decide to expand their operations in the face of record feed prices, which may not seem like the obvious answer.

"I think we will get incredibly short on the calf inventory in the next 12 months," Brown said. "The drought in Texas will only exacerbate the tightness. How Missouri cattlemen respond will be an individual choice based on their operation."

Crop outlook

Brown said it's still too early to know how much of the corn crop will end up in the bin. Soybeans, as a later crop, seem to be in better shape.

Key to the markets will be the strength of demand. For soybeans, Brown said look at China, whose demand drives U.S. prices. He expected China's consumption of soybeans and soy products would grow with the ups and downs of that country's economy.

The hay market remains another big question. Brown said conditions range from good to disastrous in a market where most sales are regional.

"We certainly are getting shorter on hay," Brown said. "I'm hearing we're facing much higher prices. I think all crop prices will start moving together, hay included."

Dairy outlook

Milk prices to producers have been stronger than most analysts expected going into 2011, Brown said. Along with that has come growth in dairy product exports, just like the livestock sector.

Record level prices for dairy products may be set this year. Brown said milk is now running $19.21 per hundredweight in the U.S. and FAPRI expects it to top $20. Returns to producers again have not improved much in light of record feed costs, he added.

The U.S. dairy industry does have an advantage in that it can respond to somewhat strong international demand. China, South Korea and Japan, the big three markets in Asia, continue to increase interest in U.S. dairy products. Contamination from melamine has prompted the Chinese to look outside their borders for dairy products, Brown said. New Zealand, one of the other major exporters, is limited by its grass-based system in its ability to expand production.

"We're next in line to pick up new global demand," said Brown. "If we get feed costs back down, and domestic and international economies continue to grow, it could be a very good time. You just want to caution producers there is a lot of risk."

To minimize risk, Brown recommended producers use forward contracting and futures markets to lock in both milk prices and feed.

Poultry outlook

The poultry industry is also struggling. Brown said high feed costs and a much slower recovery in chicken prices have held down profits while supplies have continued to increase by about 2 percent over 2010 quantities.

"I think the industry has been adjusting a lot in the last month and a half," Brown said. "I think the supply side is adjusting. They will be better by the end of the year. It's one of the toughest commodities in 2011."

During the last recession, consumers responded by buying lower quality meat products, including shifting from high grade beef products to chicken. Now that the economy is recovering, Brown said demand has spiked for high quality meat cuts again. Lower cuts have not seen a slide in demand and are not seeing a recovery, putting a heavier weight on the poultry market.

"We continue to grapple with poultry exports," Brown said. "It's difficult seeing growth with traditional customers like Russia in the last several months having equally troubling markets."

Pork industry

The pork industry has struggled in the face of record feed costs. Brown said gains in pork markets earlier in the year have been lost. With prices usually falling toward the end of the year, conditions could get even tougher for producers.

The biggest factor facing the health of the food industry remains the health of the economy. Recovery affects markets like the restaurant industry, which showed modest expansion in the first quarter of 2011 and contraction since.

"We need recovery if we've going to move livestock at high prices," Brown said.

What lies ahead in 2012 is still a big question.

"As we've seen in 2011, there have been weeks that have been pretty positive and others where we've been sliding back into recession," Browns said. "If through the first quarter we see positive economic growth and a reduction in the unemployment rate, I feel the most comfortable about the position for agriculture."

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