What would the crop and livestock sectors look like if the production ag business were a baseball game?
I recently attended a presentation by David Kohl, professor emeritus of agricultural economics at Virginia Tech. He suggested the grain industry is in the seventh or eighth innings while the livestock industry is in the third or fourth innings of the game. Here’s why.
Getting Late in the Game for Grains
Grains are late in the game because it appears they are behind from a profit standpoint, leaving few innings left to get back on top. Corn, soybean and wheat are all returning to abundant supplies, both in the U.S. and worldwide. Greater planted acreage of these crops, combined with above average yields in both North and South America, have replenished grain stores across the world. Higher grain prices over the last eight years were a result of increased global demand combined with some supply shocks due to drought, excess moisture or other natural disasters in the primary growing regions around world.
In turn, these higher prices encouraged greater plantings for grain crops. According to a Purdue University study, 147 million acres came into production worldwide between 2004 and 2012. The combination of increased planted acres with average or above average yields results in a substantial increase in supplies available to meet growing demand.
Higher grain prices improved returns for grain farmers, who also sought to increase yield to take advantage of these higher prices. Additional fertilizer, higher priced seed and competition for land drove up the cost of production for grain producers. Technology improvements in equipment, seed and fertility led to higher overhead and fixed cost structures for grain producers.
But grain prices have been falling for most of 2014. Higher growing costs and lower grain prices are resulting in a margin squeeze for grain producers. Futures price forecasts require grain producers to find ways to reduce expenses to restore profit margins.
What will bring the grain industry out of this current economic scenario? A combination of the following can bring supply and demand back into balance:
• Reduced supply from reduced planted acres
• Another weather event (drought, excess moisture, frost)
• Continued increases in global demand
An Early Inning Livestock Rally
On the other hand, the livestock industry — cattle, hogs, chicken and dairy — is positioned earlier in the game as margins are improving. Exports have been strong, prices have been rising and costs (particularly for feed) are declining, leading to a winning return.
All of the livestock sectors had been fielding higher grain prices, affecting the cost structure of the enterprise for most of the last decade. As grain prices declined in 2014, cost and margins improved across the livestock industry.
Further aiding the livestock sectors has been robust demand, particularly in export markets. Complicating the supply-demand equation, however, has been a shrinking beef herd due to years of drought conditions across the Plains.
Also, the pork sector has had a difficult turn at bat thanks to the porcine epidemic diarrhea virus outbreak over the last year. All in all, however, beef, pork, dairy and poultry producers have been rebuilding their balance sheets and working capital as margins improved in 2014.
Nonetheless, there may be some rally killers in store for the livestock sector. Russia’s ban of Western food imports — in response to U.S. and EU trade sanctions — falls heavily on livestock and dairy products; a rising dollar makes U.S. agricultural goods more expensive on the export front; and strong economic returns signal expansion across the dairy, beef, pork and poultry sectors.
The ebb and flow of a baseball game is a lot like the cycles of the production ag business. Bottom line, there is a lot of game left to play for both the grain and the livestock industries. Tightening up price risk management plans, having strong cost controls and fine-tuning your management skills can help preserve your lead and close out the game a winner.