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Agricultural News

It Could Be a WILD Ride in the US Livestock Sector in the New Year!

Tue, 04 Jan 2011 7:17:56 CST

It Could Be a WILD Ride in the US Livestock Sector in the New Year! In a welcome to 2011 report, Steve Meyer and Len Steiner have listed five "out of the box" factors that are not directly tied to livestock production- but will likely have a real impact on the profitability of the cattle, hog and poultry industries in the new year. This comes from their regular electronic news column that is released by the CME Group.

What will be the biggest factors for livestock and meat markets in 2011? There are many, many candidates but we will
take this opportunity to predict a few items that Daily Livestock Report readers should watch in the coming year. In no particular order, our top picks are:

Fertilizer prices. That one might seem a bit odd given its removal by several degrees from livestock production but we think they will be a key in this spring's battle for acres and, as they did in 2008, have some impact on the carrying capacity of southern pastures that are fertilized as a common practice. The big impact will be on "expected returns over cash costs" for corn, cotton and, to a lesser degree, wheat producers. Corn wins any race to generate revenues. 150 bushels (or 200+ in much of the major cornproducing state) times $6 per bushel generates a LOT OF REVENUE. But achieving those yields also generates a lot of cost because of the need for more fertilizer, especially nitrogen. How "expected returns over cash costs" play out for the major crops this spring will drive planting intentions and actual plantings and impact grain markets for 2011 and 2012.

Trade issues. The beef, pork and poultry sectors have seen the impacts that unilateral trade policy decisions by customer countries can have on markets. While there are not as many major issues on the table at present and some progress was made in 2010 (most notably an agreement with South Korea on a free trade pact), these factors can come into play at any time over just about any issue. Remember how quickly H1N1 influenza hit the pork sector specifically and, by extension, the entire meat protein sector? Russia's stated intention of becoming self-sufficient for chicken and pork has gained "legs" as oil prices have risen and, given the outlook from many energy analysts for even higher oil prices in 2011, will gain more momentum. The availability of resources to achieve that goal may well drive Russia to throw up a few more roadblocks to imports to give its domestic industries a chance to develop more quickly. China remains the most lucrative and most unpredictable of markets. Its view of food, and especially pork, as a strategic issue is long-established. Will it realize that it is, in fact, better off importing pork and pork variety meats? Dr. Dermot Hayes of Iowa State University makes a compelling argument that what China wants to do and what China can do must be reconciled at some point and he believe that such reconciliation will mean growing imports of pork and that the U.S. is uniquely positioned to supply that product.

Weather. The entire situation with grain supplies and demands leaves U.S. agriculture at perhaps its most vulnerable position in years regarding weather. With projected carryout stocks of 832 million bushels of corn and 165 million bushels of soybeans, we cannot stand a short crop of either in 2011. We've said it before but will way it again: The last major drought in the U.S. corn belt occurred in 1988 now 22 years ago. We are still trying to get better at predicting markets, so we will not at this time begin trying to predict the weather but history says we are due for a summer of low rainfall and high temperatures. Dr. Elwyn Taylor at Iowa State points out that, based on 800 years' worth of tree-ring data, the longest period between droughts in what is now Iowa has been 23 years. If we get through this year without a drought, we will be in new territory and bucking 800 years of history.

Global politics. The powder keg that is the Korean peninsula, the Middle East, our efforts to extricate ourselves from Iraq and Afghanistan without either falling back into disarray, etc. etc. etc. While this is obviously not a new or unique factor for 2011, it continues to overshadow the world economy. With oil at $90-plus, what would a disruption of supplies mean for the current recovery? The risk is still great.

The rules of the game in the U.S. economy. U.S. firms are still trying to figure out how to deal with sweeping new federal laws regarding health care and financial regulation. Just what those huge new initiatives mean for what firms can and cannot do and the costs of doing or not doing them is still unknown and that uncertainty is causing hesitation and slowing the economic recovery. Last week's unemployment filings were encouraging and some analysts are now predicting the job creation will pick up in 2011. That almost has to happen, does it not, since 2010 was so sluggish for job creation? But until firms know what they can and cannot do, we think they will be hesitant. Throw in an election which changes the entire tenor of Congress and apparently changes President Obama into a deal-maker and decision makers may find no less uncertainty even though the apparent range of possible outcomes has perhaps become more business friendly. This same "uncertainty" factor applies to the livestock and poultry sectors regarding the outcome of the GIPSA rulemaking process. In it's post-comment-period remarks, USDA indicated that the proposed rules was just a "starting point" but the question now is whether the final rule will be much different from the proposed rule.

Meyer and Steiner add that "This list is by no means exhaustive. We have not even touched on factors within the livestock and poultry sectors. Will chicken companies continue their current apparent slowdown in response to lower margins or will they drive for market share? Will hog producers actually reduce farrowings in the second half of the year? Are the apparently Draconian reductions in the beef cow herd real? We'll explore those as the year unfolds. Welcome aboard, again, to our usual, thrilling and, at times, terrifying roller coaster!"



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