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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.

Third Quarter Commodity Review

A snapshot of market forces and current expectations, excerpted from our third quarter financial results for 2015:

GrainThe margin outlook for most crop producers continues to look challenging for the next several years with most forecasters projecting corn and soybean prices to be at or near break-even levels for the average producer. Yields for producers in the Western Corn Belt appear to be above average for most of the crop acres in our territory.

Young TurkeyThe Avian flu that hit the egg and turkey industries in the second quarter resulted in the death or depopulation of approximately 35 million Midwest egg laying hens, decreasing average monthly hen inventories from 300 million in April to 269 million in June, the lowest inventory level in over 10 years. There have been no further outbreaks in 2015 and adversely impacted egg and turkey producers have begun repopulating inventories. However, the potential resurgence of HPAI in the fall from migratory birds returning south represents a risk to the poultry industry in the United States, prompting producers to make bio-security improvements and review potential vaccination strategies. Based on low egg layer inventories, delayed repopulation at HPAI infected sites and seasonal holiday demand, egg and turkey prices are expected to remain high through 2015.

CattleDuring the third quarter of 2015, fed cattle prices declined by $30 per cwt., which represents an approximate 20 percent decline. Feeder cattle prices also declined by $40 to $60 per cwt., a similar percentage decline. This market movement was caused by a larger supply of beef as demand has declined and supply increased. Contributing factors included large numbers of market ready cattle at very heavy weights, competing proteins at lower prices, and a decline in exports related to a strong U.S. dollar. This cattle price decline will result in lower profits for calf producers compared to a year ago, but most calf producers will remain profitable. Cattle feeders will likely experience losses on current inventories that were not covered by contracts or other risk management strategies. In the case of both calf producers and cattle feeders, most producers experienced exceptional profits during 2014 and have retained significant risk bearing capacity going into this market correction.

FarmlandLand prices and demand for farmland have moderated in our territory. Reduced commodity prices compared to previous years has led to some uncertainty and 2015 harvest results could play a key role in future land market values. Lower commodity prices and decreased margins are putting pressure on cash rents and overall land prices.

Click to view full Q3 financial report.

Note: As stated in our third quarter financial report for 2015, current expectations are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties.