What’s driving agriculture in 2018?
By KAREN SCHWALLER
SIOUX CENTER – Tight profit margins have been part of farming for generations.
But producers attending the Feedlot Forum in Sioux Center, held earlier this year, were enouraged by speaker Mike Pearson, host of TV’s “Market to Market,” who told them how to look ahead.
“You’ve got to know your cost of production. You’ve got to market effectively and, most importantly, don’t get down,” Pearson said. “We are in a period of recalibration. For those of you who make investments wisely, this period can set yourself and your farm up for generations. There will be opportunities, and when they come, take them.”
He said agriculture is “sitting still in a period of uncertainty,” with on-farm revenue decreasing as prominently in the heart of the Corn Belt as it has since the Great Depression. But he said stabilization is beginning to occur.
Net farm income is roughly half of what it was in 2013, and he said projections for 2018 don’t call for substantial decreases. According to Pearson, this is only good news if producers are operating above the cost of production.
Following a period where prices were high or very high for grain and all of its inputs, Pearson said the industry is beginning to correct, or “rationalize.”
“The last 10 years – from 2005 to 2014 – were an anomaly in the world of agriculture,” he said. “As we look ahead, we’ve got, potentially, another 25 years before we see the cycle peak. We see it every 30 years, and we had the last one in 2013.”
Pearson added the bulk of agriculture happens in tight margins because it’s a commodity-driven industry. He believes the next 20 years will be prosperous, but not over-the-top, requiring producers to give their decisions more thought, spend more time with their record-keeping books and receipts, and figure up costs so marketing can be done aggressively when opportunities arise.
He said it will be important for producers to compute their own costs because averages can be misleading and can lead to poor decisions at marketing time. Additionally, Pearson said using information from Commitment of Traders reports is a “fantastic tool” to help market grain profitably because it tells who is setting the market prices in Chicago. Though he said it won’t always lead to the best possible price, it’s still one of the more useful tools out there.
“We can’t make buying and selling decisions (to an extent) based on the information we’re picking up each week for free in that report, because we know large-scale speculators don’t have any connection to the crop or livestock being grown,” he said, adding that whenever planting or growing conditions are uncertain, outside speculators will capitalize.
Additionally, that money goes potentially into producers’ pockets when outside speculators become aggressive and want to pay for a commodity. He advised producers to watch the charts for patterns, and use them to help make money.
Pearson said demand for U.S. soybeans by southeast Asia and China has been underestimated by the USDA for the past 10 years. And yet, soybean exports from the U.S. have not been as healthy because Chinese government officials have been getting some of their soybeans from South American surplus stockpiles.
For the first time in American history, he said soybeans this growing season could “out-acre” corn, and encouraged producers to take advantage of futures markets and rallies as they occur.
He added that domestic beef demand is carrying cattle producers today, and said Americans spent more money in restaurants than in grocery stores in 2016, attributing it to the notion that the millennial generation (people aged 35 and under) doesn’t want to purchase things as much as they want experiences, that they cannot cook and don’t want to cook.
“That’s why I’m fairly optimistic about the next couple of years in the beef industry,” Pearson said. “We do need export demand to pick up. We are increasing the herd size in this country, so we need to find more growers, but the domestic strength is incredible.”
He suggested keeping an eye on the stock market and housing prices in order to know when profit margins will be their best in the cattle feeding sector.
The beef sectors, feeder cattle still look good-with the corn market being flat and the live cattle market being stable with the potential for profitability. He said the American cow/calf sector have been profitable on average for the past 11 years, the longest period of time of profitability of any sector in the ag industry in history to his knowledge.
But he said a reckoning is most likely coming within the next couple of years.
“For the past eight years the technical buy in the feeder market is $55,” he said.
Hogs, he said, have been the ‘Cinderella market’ for the past year, with herds growing exponentially, domestic and export markets being strong, and hogs bringing new packing plants online.
“This market has grown and grown,” he said. “We have been facing the threat of a wall of pork overwhelming us for the past two years. But again, the demand has been strong. This is an industry that has been active and has found buyers for its product at levels of profitability for the packer and the producer. Beef has a lot to learn, even though we (beef producers) are less vertically integrated, we don’t make decisions as an entity.”
Pearson went on to say that the beef industry is in a period of transition, with global markets demanding more beef because of countries with increasing middle-class status. China’s middle class has increased by 42 percent, he said, and when people have more money, they increase meat consumption. He said when people moved from rural into urban areas, more jobs were created, helping increase the middle class.
While he said China’s middle class may not expand another 42 percent, other areas of Southeast Asia continue to grow, and will also form new middle class sectors.
“Southeast Asia is going to be the driver of high value protein markets for the next 10 years,” he said. “We are going to benefit by shipping them corn-fed, well-marbled, delicious American beef, but we are also going to see them grow their own livestock herds … and they cannot grow corn and soybeans. We need to be the supplier of feed to these countries as we look ahead to the next 10 years. This is where margin is going to come from in agriculture. This is where we are going to be profitable on a smaller level for the next 10 years.”
Pearson said concerns will someday rise because the Ogallala Aquifer is becoming depleted. He said as a result, for the next 25 to 50 years it could become cost-prohibitive to get water out of the aquifer. Also, he said regulations could change to limit the amount of water people can pump out of it.
“Either way, we are going to see this system of agriculture change. We’ll see a lot of the large existing feedlots have to rethink their operations; (we’ll see) a movement of corn and soybean production away from the Ogallala Aquifer across the Missouri River north and east. I think we will also see the same thing happen with livestock production,” he said.
Pearson added it’s beginning to show in South Dakota with pork and in feedlot production, with new slaughter facilities opening up closer to the Heartland.
“This whole system of cattle production was built on the ability to buy corn below the cost of production and ship it down to an area where they had free water. Both of those things are changing as we look ahead and we’ll see livestock follow the feed and water back up to our side of the Missouri River,” Pearson said, adding that he anticipates new packing plants opening up farther north.
“The livestock industry will be pushing our direction, and I think a lot of land going to grassland will become cow/calf country,” he said.
On the other side of the Missouri River, he said larger rainfall events are becoming more common, and producers in this region will need to be aggressive in limiting the amount of nutrients that run off of farm land into the river and down to the Gulf of Mexico, creating the ‘Dead Zone.’ He sees regulations governing that process, adding that cover crops and terraces could be key to keeping water healthy.
Pearson encouraged producers to tell the story of water quality and what they are doing to keep it healthy; to get involved in encouraging elected officials to create more trade options for U.S. grain and meat, and most importantly, to tell the story of agriculture.
“The average person is three generations removed from the farm … and they are living (all around us) and working as journalists, regulators and legislators. We have to tell our story to those outside the industry use (social media), or invite people to your farm to let them see that the ag industry isn’t ‘big agriculture’ that it’s made up by a series of business people trying to build a lasting legacy to leave to their children, to their children’s children, or at least, to make a living. Those are the challenges that face us.”
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