Livestock Outlook More Certain Than Field Crops

LANSING - Jan 15/10 - MFB -- A potential federal boost to the ethanol market, South American forecasts, and an international outpouring of "wheat, wheat, wheat" will influence U.S. farm fortunes this season. Meanwhile, the forecast for livestock is optimism tempered with caution. That's according to agricultural economists who spoke at the American Farm Bureau Federation (AFBF) 91st Annual Meeting in Seattle, Wash., Jan. 10-13.

Leading a session on the 2010 crop outlook, former AFBF economic analyst Terry Francl reported that while existing ethanol plants are running at an average 85 percent capacity, reported production appears to be coming back on track as margins rebound. The economy is expected to slowly rally, and plants sidelined by bankruptcy and financial woes will resume operation under new management, he suggested.

"We'll probably see corn acreage expand around the 90 million-acre level, up a little over 3 million acres from this past year," Francl said. "Soybeans will probably hold. The big decline will be in the wheat area, down around 3 to 4 million acres. The other thing is, we've got about 2 million acres coming out of the Conservation Reserve Program. So we may pick up another 200,000 acres to 300,000 acres in corn and soybeans, maybe a little in the wheat, but that's about it."

Here's how Francl sees the 2010 market prospects shaping up:

The two greatest potential demand factors heading into summer are export numbers, which currently are lagging "on the low end of expectations" and could drop even further; and the Environmental Protection Agency's (EPA) decision regarding nationwide adoption of a standard ethanol-gasoline blend rate between the current 10 percent and a proposed 15 percent. EPA is expected to rule on blend levels by June.

Meanwhile, feeding numbers may rise as livestock require additional calories to weather a frigid winter. Bottom line: Prices optimistically may trade in the $3.75 per bushel to $4.25 per bushel range into spring, when uncertainty over crop/acreage bidding and planting prospects may boost corn into the $4.50 per bushel to $4.75 per bushel zone. Assuming a normal fall crop, Francl sees prices backing off potentially to a $3.75 per bushel bottom by September and well into November during normal fall harvest price declines. Stock-to-use ratios for corn will drop slightly to 13 percent down just .8 percent from the 2008-09.

The big unknown in price projections is the eventual impact of un-harvested corn acres in the upper Midwest. With an estimated 5 percent of the crop still standing in the field on a national basis, Francl says some states such as Minnesota and the Dakotas have nearly a third of their corn crop still in the field. With the severe winter across those areas, Francl said many are questioning whether those corn acres will ever be harvested. Nonetheless, those bushels are treated in the stock-to-use figures as "on-farm" stocks.

The South American crop is the wild card in the mix. Last year, an Argentine drought contributed to a 20-percent drop in the crop, but good rains have replenished potential for trend-line or near-trend-line bean numbers and thus increased export pressure on global prices. Francl anticipates near-term prices around $9.50 per bushel to $10.50 per bushel, with the spring corn-soybean "bidding war" adding a possible 25 cents to 50 cents. But a bountiful South American crop conceivably could knock prices to $8 to $8.50 per bushel levels by fall.

"The stock-to-use ratio has been building over the last two years for soybeans and we look for that trend to continue into 2010," Francl said, adding that the projections show a dramatic jump from 7.9 percent for 2009-10 to 16.3 percent for 2010-11.

"What does that mean to the markets? It means extreme price volatility on both the upside and to the downside," Francl warned, adding that producers need to be working with their brokers to take advantage of the high-side market opportunities.

"There's not much you can say, other than we've got wheat, wheat, wheat everywhere," Francl said, noting bushels flowing from the Black Sea region, the former Soviet Union, Argentina, Australia, and Canada. Thus, wheat likely will trade in the $5 per bushel to $6 per bushel range, with pressures toward a possible $4.50 per bushel by harvest.

With stock-to-use ratios showing major growth from 13.2 percent in the 2007-08 market year to a staggering 43.4 percent during the 2009-10 cycle, Francl predicts wheat likely will trade in the $5 per bushel to $6 per bushel range, with pressures toward a possible $4.50 per bushel by harvest.

In a seminar on the economic outlook for livestock, John Anderson, an Extension livestock economist with Mississippi State University, said the livestock market in 2009 was "pretty tough, but there are good reasons to be optimistic regarding where these markets are headed as we move through 2010."

Negative profit margins in 2009 for beef, pork and poultry producers led to reductions in supply heading into 2010, which means a more favorable supply situation. Swine herd reductions, spurred by negative returns 25 of the last 27 months, also has set the stage for 2010.

Likewise, broiler production saw a decline in 2009 - the first since the early 1970s. And the extremely severe winter throughout the United States has helped to reduce overall beef supplies due to lower carcass weights.

"So we're a long way from burdensome supply levels in the livestock sectors; we're looking at historically low levels," Anderson said. "We've got nothing from the supply side keeping the livestock markets down."

However, questions still remain on the demand side of the equation, Anderson said, noting that gross domestic product retractions as high as 6.9 percent in the first quarter of 2009 had a big impact on what consumers were willing to spend at the grocery store.

"We really need help on the demand side, and there are signs of improvement," Anderson said. "The general economy remains the key to future developments in the livestock market."

Anderson said demand recovery has started to appear, but market participants must be convinced that the demand recovery is real. "Market participants must be convinced that demand-side improvements are here to stay," he said.

In addition to improving market prices, livestock producers should see improvements in profit margins in 2010.

"Feed grain prices remain historically high but have stabilized in recent months. Increasing grain and oilseed stocks have reduced some of the pressure on grain prices that has been the dominant feature of those markets since late 2006," Anderson said.

"There are good reasons for cautious optimism regarding feed prices, but volatility may continue to be an issue," he cautioned.

Demand from international trade is also a major wildcard in 2010 that could have a dramatic impact on livestock profit margins. Anderson said current trade disputes with Russia, China and Tiawan could impact all livestock sectors, since all three countries are ranked in the top five meat export market destinations for hogs, cattle and broilers.

"This year is shaping up to be one of the best years for livestock and poultry producers in several years but this will depend on healthy demand supported by a recovering economy," said Anderson.

Copyright (c) 2010 Michigan Farm Bureau