Multiple factors work in unison to turn the tide on a weary but resilient livestock industry
After four and even five years in the red, livestock producers crave even a hint of greener pastures. Mention the possibility of an entire decade on the other side of the break-even fence, and there’s nothing that will hold back the stampede of relief. That’s exactly what a recent report from the Food and Agricultural Policy Research Institute (FAPRI) predicts, based on export enthusiasm, lower feed costs, a population surge and, in many states, rebounding drought conditions.
Later this year and next year, profits are expected to return to all livestock sectors, if they haven’t already—with the lone exception being feedlot cattle, a segment still in transition. FAPRI predicts the upside trend to continue through 2022, with corn prices staying below $5 per bushel.
"Overall, this has been the worst situation ever for livestock profitability," says Scott Brown, ag economist at the University of Missouri. "Livestock producers got hit with the double whammy of high feed costs and the worst economic downturn in decades that curtailed meat demand."
Dairy was hit with record losses, and the hog sector experienced the worst damage since the 1990s. The cattle industry was forced to the lowest inventory in more than 60 years. Poultry wasn’t exempt, either, suffering from $7 corn and a halt in growth and demand. Through it all, livestock producers used their ingenuity to survive such challenging times.
After an extended period of tough losses, livestock producers are rightly skeptical about a rosy forecast. More than any other factor, perhaps, the bullish outlook hinges on one word: weather. Feed prices, so critical to a livestock producer’s bottom line, are directly linked to crop production. These bullish forecasts do not include a repeat of the 2012 drought, which was a 50-year event.
Beyond the feed factor, the key to livestock profitability and growth is exports. "Per capita consumption for livestock products is likely to be stable in the U.S.," says Derrell Peel, ag economist at Oklahoma State University. "We’re a mature market."
After tumbling during the recession, he does see the possibility for some uptick in beef demand, if the economy picks up and if the industry can provide a more consistent product. The latter will require more beef segment coordination, he says.
Brown adds that per capita meat consumption declined by a whopping 20 lb. from 2007 to 2013, to 200 lb. With a stronger economy, he sees the possibility of gaining back 10 lb.
Long term, Brown agrees that consumption growth will equal population growth. Prior to 2009, the U.S. population was growing by 1.1%, but since then, only by 0.7%, explains Michael Swanson, ag economist and vice president with Wells Fargo. It’s an open question on whether it grows at 1.1% again. This has enormous consequences for the U.S. livestock industry’s future and how rapidly it can grow.
Peel is far more bullish when it comes to exports. "Clearly, exports represent the greatest opportunity." Pork and poultry, he notes, have shown steady export growth in recent years,
The newest kid on the export block is dairy, which exported just 3% of production a decade ago, but it now exports 15%. FAPRI forecasts that dairy will export 20% to 25% of its production by 2022. Key to dairy export growth has been the elimination of export subsidies by the European Union, which allowed world skim milk powder prices to increase to the point that the U.S. was cost competitive, says Mark Stephenson, ag economist at the University of Wisconsin.
A weak U.S. dollar and rapid growth and demand in the Asia/Pacific region have also boosted livestock product exports. The market for dairy products has been particularly strong in China in recent years. That has directly and indirectly helped the U.S., Stephenson says. Since New Zealand, the No. 1 dairy exporter, has taken the lion’s share of China’s business, that has
allowed the U.S. to export to some of New Zealand’s former customers.
Once the U.S. economy heats up and interest rates rise, the dollar will strengthen, but Swanson notes that will make the U.S. less price competitive than it has been. When that occurs is anyone’s guess, he acknowledges.
In Brown’s view, as important as exchange rates are, a more important factor is growing demand. "Half of the world’s population is in the Asia/Pacific region. Economic growth in that region (excluding Japan) is expected to jump 4% to 5% in the coming decade," he says. As a result, the potential for continued strong livestock exports is a bullish one.
Questions ahead. Some see potential warning signs for U.S. livestock exports in the long term. "The livestock industry is more mobile than crop production and will go wherever it needs to go to reduce costs," says Michael Boehlje, ag economist at Purdue University. The U.S. livestock industry was built on cheap feed and modest regulation, he says. Neither is true anymore.
In particular, Boehlje has concerns about current and future regulations increasing the cost of production.
Furthermore, land and labor costs are higher in the U.S. Cash grain costs can run $500 per acre in the U.S., but are only $45 in the Ukraine, Swanson says. Yields can be quite similar.
Equally important, Boehlje says, is growing competition. Brazil, Ukraine and others have cranked up grain production, and some are making major investments in livestock. Brazil, already a significant beef producer, has been increasing its beef and veal production since 2009—all while U.S. numbers dropped. Boehlje also notes that China has made huge investments in its livestock sector, which could displace some U.S. pork exports.
"I’m not concerned about the next five to seven years. But over time, our share of global exports will shrink," Boehlje says.
Not all share those concerns. "We have a cost-of-production advantage," says Dermot Hayes, ag economist at Iowa State University. That includes access to high-quality grain, a high-quality workforce and technological and management advantages, he says.
China’s livestock production costs are much higher than in the U.S. Moreover, China is approaching its limits of how much it can actually expand pork production, Hayes adds.
While Peel is also bullish, he notes that as U.S. livestock industries export a larger share of their production, risk and volatility increase, too. That places a greater need for producers to put risk management tools to work. "When you’re involved in international trade, producers become more vulnerable to political factors, markets can be closed and trade policy changed."
While time will tell exactly how green the pastures get, it’s good to get a breath of fresh air—and march forward with a plan.
Export Opportunities Brighten Livestock Outlook
(Click here to view full details)
While the majority of the cattle, hogs, dairy and poultry raised in the U.S. are consumed within the country, there is growing potential beyond the U.S. border, which will help bolster farmer profitability. According to the Food and Agricultural Policy Research Institute, about 18% of U.S. meat production is exported. That percentage is expected to increase by 2% to 4% in the coming decade, as reflected in the projected export numbers below. The rise in exports stems from steady global economic growth, a further depreciation of the U.S. dollar and continued foreign demand for U.S. meat.
You can e-mail Ed Clark at email@example.com.
- September 2013