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The Perfect Storm

The inverse thrills of the past year will be remembered by many livestock market participants. Cattle, hog and poultry producers all had their share of adversity and resulting market turbulence.

Avian influenza ran riot through turkey and egg houses and pork producers saw a slingshot effect that carried production to record levels and prices to four-year lows as output more than recovered from the 2013-14 bout with porcine epidemic diarrhea virus. Fed-cattle prices set new records on short supply only to plunge by $21/cwt. in the course of six weeks, a magnitude of loss for that length of time exceeded only in 2004 – during the mad cow crisis. Even dairy producers saw market volatility.

“The livestock industry experienced back-to-back extremes,” said Jud Jesske, Frontier Farm Credit vice president of agribusiness lending with an emphasis on beef producers. As can be seen in the chart below, weekly total meat production swung from as much as four percent below a year earlier during 2014 to better than 6 percent above in 2015.

Weekly Beef, Pork, Broiler Production

The strong dollar doesn’t help. Based on USDA’s agricultural trade-weighted index, USDA’s index began its upward sprint in August 2014. By the end of the year, it was 10 percent above a year earlier. While foreign exchange rates are far from the only factor affecting exports, it is widely agreed that a strong dollar makes U.S. products more expensive in global markets.

The Strong Dollar provides headwinds for exports

Data: USDA/ERS

Total U.S. meat exports plummeted beginning in May 2015 (see chart below), and the 2015 total is estimated to be down 1.3 billion pounds from 2014, bolstering domestic supplies by a like amount, according to CattleFax  That is the largest one-year drop, with the exception of 2004 in the wake of bovine spongiform encephalopathy.

US Total Meat Exports

From May 2015 to October 2015, beef exports slumped by more than 30 percent to their lowest level in 20 months. Pork exports recovered from the plunge seen during the trough in supply due to PEDv. But in November 2015, they fell 18 percent below the same month in 2014. Broiler meat exports also have slipped by almost a quarter from year-ago levels.

Cheap corn = more meat

Adding to the supply, production rose dramatically as both cattle and hog weights climbed. Combined with slower exports, the net meat and poultry supply in the United States increased nearly 4.5 billion pounds from 2014 to 2015, the largest yearly increase in almost 40 years. Looking at the past decade, meat supplies rose from the third smallest in 2014 to the largest in 2015.

“Many of our customers felt the effects of the disease outbreaks and the resulting market gyrations,” says Marshall Hansen, vice president of Frontier Farm Credit Agribusiness Finance (ABF). “However, volatility is a fact of life in agriculture. And while it was exceptionally high in 2015, most of the operations we work with were in a good position to deal with it.”

Several ABF customer operations hit by the deadly bird flu HPAI H5N1 lost months of business and were forced to lay off employees, but are now rebuilding flocks. Case Gabel, a young Nebraska cattle feeder, notes that “cattle equity swings on a weekly basis have been unprecedented. But forward crush margins are as healthy as we’ve seen in several years and futures and options allow us to minimize financial risk.”

As the year drew to a close, the market looked as if it might improve following the quarterly hogs and pigs report and monthly cattle on feed report, both of which indicated slightly tighter supplies than were expected. Heading into 2016, we will share additional insights into each of the livestock markets, beginning with the impacts of HPAI.

Geopolitics, Food Trends to Create Market Opportunities for U.S. Ag

We recently invited leaders in farming, ranching and agribusiness to step back from the day-to-day work of agriculture to talk about what the future holds for U.S. producers. Experts in protein, consumer trends and geopolitics outlined the challenges agriculture will face – at home and across the globe – in the next five to 10 years. All agreed that U.S. agriculture is in an enviable position to capitalize on its strengths to expand its market presence.

“We are moving from a world in which the U.S. is the largest capital provider and the largest consumer base to one in which the U.S. is the only capital provider and the only consumer base. And that is only 15 years away,” said Peter Zeihan, a geopolitical strategist, forecaster and author of “The Accidental Super Power.”

Brett Stuart, an economist and CEO of Global AgriTrends, observed that “the opportunities have never been better.”

Following are some of the thought-provoking views shared by the guest presenters at our 2015 Agribusiness Finance Executive Summit in Omaha as they analyzed trends shaping the future of U.S. agriculture:

  • Demand for agriculture products in the next 15 years will be driven by the world’s growing middle class, projected to increase to 5 billion by 2030. This growth will be concentrated in urban areas, where people use their wealth to buy better and more food, particularly in the area of protein, Stuart said. Sector-specific projections:

    Poultry
    will overtake pork as the world’s No. 1 source of protein by 2020. Poultry consumption is being driven by population gains in southeast Asia and Africa.

    Aquaculture
    surpassed beef for the first time last year in world consumption. Tilapia produced in China dominates this market. Aquaculture will continue to thrive, competing with other protein sectors for feed.Beef production hasn’t increased in seven years, even as the world added 550 million people and GDP rose by $14 trillion. The resulting record-high prices are projected to peak in 2015 before returning over the next five years to pre-boom years – about $1.70 per pound by 2020.
  • As countries struggle to meet demand, more will choose to import cheaper, more efficiently produced food. Half of Japan’s calories come from imported food compared to 1.5 percent in China. It will take time, but eventually China’s self-sufficiency experiment will fail, Stuart said, and the market will open to outside food producers.
  • Southeast Asia and Mexico will be growth markets for U.S. ag producers, Zeihan said. Southeast Asia has a young population that is urbanizing at three to four times the rate of rest of the world. With little to no food production of its own, the region is filled with hungry people friendly to the U.S.Mexico will be the world’s fastest growing economy for the next 50 years. Only Afghanistan has worse topography, meaning Mexico has no choice but to import food to feed its people.
  • Europe’s anti-GMO policies will erode, giving way to a market open to both GMO and GMO-free products, Stuart said. Already, Europe is loosening some anti-GMO laws to ensure its protein producers have access to feed.
  • Aging populations and other market factors will cut into Canada’s and Brazil’s global competitiveness, leaving U.S. ag to dominate trade, according to Zeihan. U.S. producers, however, would be wise to keep an eye on Argentina. With the right government policies, Argentina could use its labor pool and waterways to become a market force.

View the full presentation by Brett Stuart, CEO of GlobalTrends:

View the full presentation by Peter Zeihan, author of “The Accidental Super Power”: