Marketing

By Jeff Stolle

 

With this likely my last column for 2007, I’d like to take more of a “big picture” look at the marketing arena as we prepare for 2008 and beyond. In that spirit, let’s start out by looking at the biggest recent change in the ag commodities marketplace – and one that has had and will continue to have wide-reaching effects on many production ag sectors and eventually the consuming public. I speak of course of the sharp increase in feed-grain prices over the last year, which can be credited in large part to corn becoming as much a fuel commodity as a feed commodity.

There is little doubt as of early October that the nation is in the process of harvesting the largest corn crop in history, one that is likely to total 13.25-13.5 billion bushels. This is the result of a sharp increase in planted acreage (both planted and harvested acres are up 18-20 percent from last year) and excellent growing conditions throughout most of the nation’s major production areas. This year’s crop will likely measure a nationwide average yield in the 155-158 bushels per acre range (second only to 2004’s 160 bushels per acre record) and should result in a 2007-2008 carryout in the range of 1.7-2.0 billion bushels. USDA’s most recent supply and demand report for U.S. feed grains projected an “average farm price” of $2.80-$3.40 per bushel for the 2007-2008 crop year. Essentially, no one should run out of corn between now and next year’s harvest, and the market should not have to be overly concerned about rationing supplies.

However, that said, we must remember that the incredible rally through last year’s harvest had more to do with buying acres for the coming year’s production than it did with rationing short-term supplies. With July 2008 CBT wheat futures trading over $6.80 per bushel and November 2008 soybean futures trading near $9.65 per bushel as I pen this, $4.19 per bushel December 2008 corn futures are not out of line. Soybeans and wheat will compete to buy back this year’s lost acreage, and therefore there seems to be little downside in the corn market unless and until there is some significant negative news from the demand side of the market.

A second challenge for the cattle feeding industry comes in the fact that total feeder-cattle supplies look to remain tight for at least another two to three years down the road. Drought conditions have impacted many Central and Northern Plains and Mountain West areas over the past few years. And although many of those areas had plentiful rainfall through this year’s grazing season, the Southeast suffered through one of the driest summers on record. Keep in mind that, as of Jan. 1, 2007, USDA reported a total of 6.435 million beef cows in the eight-state area of Kentucky, Virginia, Tennessee, North Carolina, South Carolina, Georgia, Florida and Alabama compared to a total of 6.295 million head in Idaho, Montana, Utah, Wyoming, Colorado, North Dakota and South Dakota. My point is simply that drought throughout the southeastern part of the country can have a substantial impact on nationwide cow numbers and, consequently, on total feeder cattle supplies.

USDA’s July 1, 2007 cattle inventory report estimated that 6 percent fewer heifers were held back as beef cow replacements, compared to the previous year. Combining that data with the liquidation of cow numbers noted in the Southeast this summer, there seems to be little hope for any significant increase in total feeder-cattle supplies for at least three years down the road. Therefore, from a margin perspective, the cow-calf sector appears poised to remain “in the driver’s seat” for at least a couple more years, while cattle feeders and packers are likely to continue struggling to match available supplies to production capacity in a way that will allow for consistent operating margins.

Finishing on a tangent is probably not good form, but I’m going to do so because I find this subject to be one of the most interesting items in our industry’s news right now. JBS, the new owner of Swift, has been very vocal about their plans to add a second shift to their Greeley, Colo., beef plant as well as quickly work toward 100 percent capacity utilization at their remaining plants at Grand Island, Neb.; Cactus, Texas; and Hyrum, Utah. While JBS is a company with a proven track record in the beef industry in South America, this decision to increase production and capacity utilization immediately seems quite aggressive given the overall cattle supply picture I’ve outlined earlier in this article. If JBS carries through with their stated plans (and there is no reason to assume otherwise), the ongoing margin crunch in the packing industry has the potential to cut deeper and last longer than otherwise might have been the case.

Until next time, try not to buy the highs or sell the lows, and remember that volatility creates opportunity. Y Jeff Stolle is NC’s vice president of marketing.