HUNTIN' DAYLIGHT -- FEWER AND BIGGER

by: Wes Ishmael

Whether the proverbial chicken or egg, another round of agricultural consolidation appears to be spurred along by suppliers dealing with narrow margins.

More specifically, CoBank analysts say that continued low commodity prices, increased foreign competition and the strong U.S. dollar will stress U.S. crop and animal supply chains leading to more industry consolidation, which will introduce the next phase in the evolution of the agricultural industry.

“The U.S. grain and farm supply industries have reached another historic inflection point that will be good news for some and bad news for others,” says Tanner Ehmke, CoBank senior economist and author of a new CoBank report. “This trend is expected not only to continue, but to accelerate as agribusinesses adjust to a climate of low prices and thinning margins.”

Similarly, Justin Sherrard, Rabobank's global strategist—animal protein says, “In a market driven by supply, we expect prices to come under pressure next year–a boon to consumers but a clear challenge for producers and processors…”

Sherrard's comments are based on the recent Rabobank report, Prices Under Pressure in a Supply-Driven Market: Global Outlook for Animal Protein in 2017.

Rabobank predicts an increasingly complex production market, making it more challenging for producers to exploit opportunities. They may come under additional pressure to adapt their systems to mitigate threats including the focus on antibiotics use, the attention on livestock as a source of greenhouse gases and growing retailer competition. Rabobank analysts say this complexity is creating new growth opportunities for the producers and processors that read the market accurately and respond swiftly.

Responses are likely to include strengthening supply chains, coordinating inputs and increasing transparency to improve traceability in supply chains, according to Rabobank.

“The onus is very much on producers to mitigate the concerns of consumers, particularly around animal health and welfare issues, by adapting their production models and supply chains,” Sherrard says. “This is a challenge which will continue to be a major theme in 2017.”

The confluence of market factors that CoBank says will dramatically reshape the U.S. grain and farm supply industries between 2017 and 2019, include:

• the current global glut of grains and the expectation that production will continue to outplace demand over the next several years, barring a severe weather event in a key production country.

• increased competitiveness of foreign producers—particularly countries such as Argentina, Brazil and Russia—which have expanded production to take advantage of the export opportunities created by their weaker currencies.

• the strong U.S. dollar will continue to impede U.S. exports, CoBank analysts say, and is causing many producers to reconsider their crop rotations, switching from wheat to more profitable and higher-performing crops, such as corn and soybeans.

CoBank expects these conditions to exert additional pressures across the U.S. agricultural spectrum—from producers to farm suppliers to retailers—which will drive a continuing trend of consolidation. CoBank analysts expect farm size to increase as farmers acquire acreage outside their existing territory, which will exert consolidation pressure on the retailers that serve them. In addition to consolidation within the respective retail and wholesale categories, some wholesalers are expected to merge with retailers, resulting in compression of the supply chain.

While global meat consumption continues to rise, according to the Rabobank report, a supply-driven and more competitive market will create challenges for producers, putting pressure on prices and margins.

Late-season Price Strength

In the meantime, cattle producers are heading into 2017 with increasing hope.

“Fed cattle prices are now five to six weeks into a rally off the lows set in early October. The rally in feeder cattle is less steadily strong but is still decidedly off seasonal lows,” explained Stephen Koontz, agricultural economist at Colorado State University, in a mid-December issue of In the Cattle Markets. “So far the main bullish fundamental news appears to be that that low prices do what they are supposed to do…we continue to see strong volumes of fed cattle marketed and strong Saturday kills at beef packing plants. Retail prices continue to soften but there is as of yet little weakening of the retail margin. Further, packer margins have weakened but remain rather healthy. So, the news appears to be that fundamentals are not changing such that market conditions will continue to get bearish.”

“The transition to bigger beef supplies—and psychologically to the idea of bigger supplies—that began impacting cattle markets in 2015 continued in 2016,” said Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “Markets adjusted down, including a brutal, fear-driven crash in markets in the third quarter, followed by a significant rally in the fourth quarter. Fed cattle prices recovered 12-15 percent since mid-October, while feeder cattle are up 10-12 percent. Calf prices increased about 25 percent since the October lows.”

Feedlot placements through the fall were lower year over year, as many cow-calf producers refused to market calves at the under-valued prices seen through October. As calf prices improved, so did auction receipts through the middle of December.

“The expected slower pace of cattle placements in late 2016 will slow beef production increases in the first half of 2017,” said analysts with USDA's Economic Research Service (ERS), in the December Livestock, Dairy and Poultry Outlook. “However, supplies of slaughter-ready cattle are expected to support a three percent increase in beef production in the first half of 2017.”

Plus, there was support from late-season strength in cash fed cattle prices, tied to a rally in wholesale beef values.

“Choice boxed beef price has risen 6.7 percent from the late October low and was only 2.3 percent below year-ago levels,” Peel said, heading into the second half of December. “This is quite impressive given that beef production continues stronger than expected in the fourth quarter. Beef production for the last four weeks is 9.1 percent above the same period last year. For the year to date, Choice boxed beef prices have averaged 12.9 percent down from year-earlier levels, while beef production is up 5.7 percent so far this year.”

Resurgent export markets continue to add increasing support, too.

For January through October, beef export volume was up nine percent from a year ago, while value was down three percent to $5.1 billion. Through the first 10 months of 2016, export value averaged $254.71 per head, down eight percent.

Rabobank also predicts the ongoing shift of developing countries to more meat-based, Western-style diets, which will continue to drive consumption – and therefore support the prices – of soybeans (currently 1,020 USc/bu.), which play a major role in feeding livestock, pork and beef.

Markets in the New Year

“The beginning of 2017 brings with it several market dynamics that have not been witnessed in several years,” said Andrew P. Griffith, agricultural economist at the University of Tennessee, in his early-December market comments. “Calf and feeder cattle prices will be at their lowest level to start January since 2011. Cattle inventory will increase for the third consecutive year, which has not happened since the 2005-2007 time period. Cattle inventory will likely be at its highest level since 2010.”

Moreover, there's a new president for the first time in eight years.

“How the markets will react in 2017 and beyond will depend on policy changes, consumer behavior, and producer reaction to market forces,” Griffith explained. “The spring of 2017 is expected to bring a seasonal price tendency with it. Calf and feeder cattle prices generally see a boost in January and then are really supported in March when spring green up begins.”

ERS projects the fourth-quarter fed steer price at $105-$108/cwt., almost 17 percent lower than a year ago. First-quarter 2017 prices are expected to average $104-$110 per cwt., about 21 percent less than the same quarter a year earlier. Second-quarter cattle prices are forecast at $103-$111 per cwt., about 17 percent below the same period a year earlier.







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