HUNTIN' DAYLIGHT -- DOWNSIDE RISK INCREASES

by: Wes Ishmael

“The past few years have been a demand-driven environment where stronger than expected beef demand led to stronger than expected calf and yearling prices,“ says Josh Maples, Extension livestock economist at Mississippi State University, in an early-year issue of In the Cattle Markets. “These have been important transition years that coped with the sharp supply increases. Looking ahead, slower herd growth numbers begin to paint a brighter price picture for 2019 and 2020 if domestic demand and exports continue to grow.“

If. Continued strength in both domestic and international beef demand could be a tall order, given ongoing geo-political turmoil threatening domestic and global economic expansion.

Domestically, U.S. economic growth last year was the strongest since 2005, according to analysts with CoBank. However, they say consumers, investors, companies and other market participants have become more wary about the near-term future. That's according to a comprehensive 2019 outlook report from CoBank's Knowledge Exchange Division (KED).

Looking outside the U.S., global economic growth continues to weaken, according to the latest World Economic Outlook Update from the International Monetary Fund (IMF).

IMF projects global economic growth at 3.5 percent this year and 3.6 percent next year; 0.2 percent and 0.1 percent less than October's estimate.

“Even as the world economy continues to move ahead, it is facing significantly higher risks, some of them related to policy,“ explained Christine Lagarde, IMF chair and managing director, at a press conference for the update. “These risks are now increasingly intertwined: think of how higher tariffs and rising uncertainty over future trade policy fed into lower asset prices and higher market volatility. This in turn contributed to tightening financial conditions, including for advanced economies, which is a major risk factor in a world of high debt burdens.“

“Trade uncertainty, rising debt levels and market volatility are threatening to derail the global economy and creating difficult operating environments for U.S. agriculture,“ says Dan Kowalski, vice president of CoBank's KED. “Trade is the outsized risk. Unresolved disputes with Mexico, Canada, Europe and China are the greatest collective threat to the U.S. economy in 2019.“

In fact, the KED report points out the value of total U.S. agricultural exports this year is expected to decline $1.9 billion year over year to $141.5 billion, according to USDA projections. Loss of soybean exports account for most of the decline.

KED analysts also point out current tariffs assessed by the U.S. on steel and aluminum are increasing costs for agricultural producers. Think here in terms of higher prices for such things as grain bins and machinery than would likely otherwise be the case.

Plus, the KED folks say in their report, “Farmers cannot bank on a fourth consecutive year of above-trend crop yields to make up for low commodity prices and rising costs. To steady the agricultural economy, and boost revenues, the sector is dependent on substantive breakthroughs in trade policy.“

At the same time, the U.S. government shutdown -- ended at least temporarily -- weighs on the domestic economy and markets. CoBank analysts estimate, conservatively, that each week of the government shutdown reduced first-quarter GDP by 0.05 percent.

As for cattle and beef markets, plenty of information went missing during the month-long shutdown, including World Agricultural Demand Estimates for January, actual daily slaughter data. The January Cattle on Feed report wasn't published; the January Cattle inventory report due the last day of the month was also in question. Never mind missing export data and ancillary crop planting and production data.

Depending on which economist you consult, the missing data and reports had minimal impact on cattle markets through the end of January because price information continued to be shared by the Agricultural Marketing Service (AMS).

Production Keeps Increasing

The pipeline of beef and competing proteins is already full and promises to grow to record levels again this year.

Maples explained beef production, expected to grow about two percent this year, would be about 15 percent more in 2019 than it was in 2015.

“This would be the fastest four-year growth since 1973-1977,“ Maples said. “With respect to the cattle cycle, recent cowherd trends suggest 2020 could potentially mark the end of the current U.S. cattle inventory build-up. But, it is worth noting that this is looking like a unique cattle cycle. History might suggest that after herd growth stops, herd declines will follow, but the ingredients for near-term herd declines are not obvious at this point. Prices have mostly remained at or above profitable levels for cow-calf producers, which does not provide much incentive for liquidation.“ He expects herd growth to be flat this year.

So, lots went right and little went wrong for cattle markets last year or the year before, according to Stephen Koontz, agricultural economist at Colorado State University. He notes strong wholesale margins, efficient movement of increased production through the supply chain and exceptional U.S. beef export levels, particularly to Japan and Korea.

“But forecasts for 2019 suggest a further 1.8 percent increase in beef production, a further 2.4 percent increase in pork production, a 1.3 percent increase in broiler production, and 0.5 percent increase in milk production,“ Koontz said in a more recent issue of In the Cattle Markets. “There will be plenty of protein and fats. While the stock market has been volatile, the underlying indicators of the macro economy have largely remained strong. That is not the case for the rest of the world. There are clear weaknesses in the world economy. There is plenty of protein. And, there appears to be plenty of downside price risk.“

Potential Signs of Slowing Expansion

“Interest in purchasing breeding stock has been cautious, relative to current spot and futures market pricing for calves and yearlings . . . Bred cow prices at auctions during the last quarter of 2018 were down 10-20 percent from a year earlier in key cattle production regions,“ say analysts with the Livestock Marketing Information Center (LMIC), in the late-January Livestock Monitor.

Based on average prices reported by AMS, analysts with LMIC say prices in Georgia were 19 percent less for cows weighing 1,200-1,300 lbs. and bred four to six months. They brought $912.30/head in December, versus $1,119.89 a year earlier.

For the same month, mid-age cows in Montana weighing 1,200-1,300 lbs. sold six percent less year over year.

“Not surprisingly, Midwest auction cow price changes from late 2017 to late 2018 posted a drop between that of Montana and Georgia; prices at Saint Joseph, MO were down 15 percent,“ say LMIC analysts.

Keep in mind, breeding stock markets in some areas, like Missouri, were pressured by drought.

Roads Ahead

As for calf prices, LMIC projects Southern Plains steer calf prices (500-600 lbs.) to average $167-$174/cwt. this year, compared to the 2018 calf price average of $171.39 last year. LMIC forecasts yearling steer prices (700-800 lbs.) at $145-$150/cwt., compared to $150 last year.

“With agricultural commodity markets depressed by global supply abundance and ongoing trade disputes, farmers and ranchers face the arduous task of cutting production costs,“ according to the KED report. “Continually rising costs in agriculture, though, are expected to squeeze farmers and ranchers, causing further margin erosion and financial stress in 2019.“

For instance, interest expense in production agriculture increased 21 percent year over year in 2018, due to increased interest rates and higher debt levels, according to CoBank.

In the meantime, so far, wholesale beef demand continues with similar strength to last year.

“Wholesale beef markets are starting 2019 with a continuation of generally strong prices seen last year,“ says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his market comments. “For the first three weeks of the year, boxed beef cutout prices are up 2.9 percent for Choice and 3.4 percent for Select compared to the same period last year.

“In 2018, weekly boxed beef prices averaged 2.2 percent higher year over year compared to 2017,“ Peel explains. “Wholesale beef prices were higher in 2018 despite a projected 2.8 percent increase in beef production and larger pork and poultry supplies.“







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