Economic squeeze challenges agriculture sector

Waldo – Except for food retailers, “profits are scarce” in the agriculture sector today, Extension Service livestock economist Brenda Boetel of the University of Wisconsin – River Falls told attendees at the 2017 cattle feeder clinics.

In the livestock sector, the current downside price cycle for producers is not likely to be completed until 2020, Boetel warned. Today's economic climate is a reversal of the situation in 2014, when it was the retailers who were feeling the economic squeeze, she observed.

The cow/calf sector of the livestock industry faces the toughest economic challenge today, Boetel stated. Unlike in most other sectors, it's the parties farthest from the ultimate sale – the cow/calf group today – who have the most difficulty adjusting to the economy, she said.

Price sensitivity patterns

Meanwhile, consumers with price sensitivity can act very fast in changing their purchasing habits, Boetel pointed out. At the moment, the meat supply is high and consumer demand for protein is strong, creating a favorable scenario for retailers, she explained.

Although retail beef prices of about $5.50 per pound are about $2 higher than for pork and $3.50 more than for broiler chicken meat and although there has been virtually no wage increase for low and moderate income consumers, there is nonetheless a strong demand for beef today, Boetel reported.

Thanks in large part to low energy prices in the past two years, annual disposal income has risen to about $14 trillion in the United States, Boetel pointed out. In addition, the restaurant performance index is favorable, helping with the sale of high value steaks, particularly in urban areas, she stated.

World trade outlook

As beef production in the world rose by 1.9 percent in 2016, the United States stood 4th among countries in the volume of beef exports, Boetel indicated. The top three beef exporters are Brazil, India, and Australia with Brazil and India dominating the export market to China while Australia's production has been curtailed because of drought, she pointed out.

The current outlook suggests that the United States will be able to increase its beef exports by 6 percent during 2017 even with a fairly strong dollar that boosts the cost to buyers, Boetel observed. Japan, South Korea, Mexico, Canada, and Hong Kong are the top buyers of beef from the United States, accounting for 82.6 percent of the sales in 2016, she reported.

“A big thing in 2017” would be any major change in trade policy initiated by the Trump administration, Boetel emphasized. She mentioned the risks to the strong market links with Mexico and Canada and noted that beef exports from the United States to Japan face a 38.6 percent tariff compared to only 9 percent on imports from Australia.

What might be surprising is that the United States imports a greater volume of beef than it exports although the exports are higher in dollar value, Boetel remarked. She expects the country's beef import volume to fall by 11 percent in 2017.

Meat market menu

Higher numbers of turkeys and broiler chickens are on the horizon for 2017, Boetel continued. She said this would change if the avian influenza, which has struck recently in Europe, returns to the United States this year.

Pork production in the United States will be up by 2.5 percent during 2017, Boetel predicted. She noted that the existing export market to China is favorable for the pork sector.

Outlook for 2017

Beef cow and calf numbers are up by 3.5 and 2.9 percent respectively during the past year, continuing the pattern of rebuilding of numbers that began in 2015, Boetel observed. What's even more worrisome is that recent data shows that cattle on feed numbers were up by 18 percent while marketings were up by only 7 percent, she stated.

This strongly suggests that cattle coming to the market in the next few weeks and months will be heavier, leading to a collapse in the basis on pricing, Boetel warned. “We're not current on the numbers.”

With 93 percent of the slaughter capacity already being used, buyers will be reluctant to bid on some of the cattle coming to the market in the near future, Boetel observed. She expects upticks of 3.4 percent on cattle slaughter numbers and of 3.5 percent on beef production during 2017.

Tabulating the losses

In response, feeder cattle prices have fallen in early 2017 and beef cow prices are down by 8 to 15 percent compared to a year ago, Boetel pointed out. She predicted that cow/calf operators can expect to endure average losses of $15 per head for their efforts this year.

Noting that the numbers apply to operations in the Southern Plains, Boetel estimated that cattle feeders might manage to earn $20 per head this year thanks to lower costs for both calves and feed. What the operators will find is that “quality pays,” she observed.

Cattle raisers need to have a marketing plan and to be aware that trade policy changes could affect them greatly for several years, Boetel advised. Counting on Tyson Foods as a potential strong buyer is not a good idea because the company “has enough supplies,” she warned.

Regarding prices in the beef cattle sector, Boetel anticipates stability by late 2017 and early 2018 after somewhat of a downturn in nearby months. She suggested that operating margins in 2016 should prove to be worse than those likely to occur in 2017.

Major crops review

In a brief review of major commodity crops, Boetel stated that “soybeans are greatly over-priced,” that alfalfa hay prices would be down by 11 percent this year, and that other hay types would be worth 4 percent less. She noted that hay stocks in Wisconsin are up by 10 percent from a year ago.

Even if corn acres are reduced by 3 million to a total of 91 million this year, a trend line average yield of 170 bushels per acre would result in a 13 to 14 percent stocks to use carryover ratio compared to the outlook of 15 to 16 percent for this year, Boetel stated.

Depending on how weather affects corn yields, the price could drop to below $3 per bushel or rise to $4, Boetel indicated. At the moment, only a few drought pockets remain in the United States and a neutral reading on the El Nino and La Nina weather patterns until July suggest another good year for grain and forage production, she observed.

Boetel can be reached by e-mail to Brenda.Boetel@uwrf.edu.