Iowa Farm Outlook. December 15, 2004 Ames, Iowa Econ. Info. 1900

Transcription

1 Iowa Farm Outlook December 15, 24 Ames, Iowa Econ. Info. 19 Beef and Pork Price Relationships Historically, beef and pork prices have moved somewhat together. They are substitutes in the consumer s shopping cart and consumers tend to switch from one to the other depending on relative prices. Although there are a lot of other factors that also influence prices for cattle and hogs this price relationship is important. The stronger demand for pork in 24 is likely due in part to the record high prices for cattle in late 23. The ratio of cattle to hog prices on live basis for 1985 through 23 has been 1.62 meaning that the cattle price was 1.62 times the hog price on a live weight basis. However, there was a significant range in the ratio for any one month. Fourteen percent of the months were narrower than 1.25 and eleven percent were over 2.25 during that 19 year period. There has also been a trend to a wider ratio, particularly since 1996 (Figure 1). During with low hog prices and 23 of high cattle prices, the ratio was over. 2.5 Figure 1 Cattle to Hog Price Ratio, Live Weight Annual On average the spread was widest (higher cattle prices relative to hog prices) in November and December. It is lowest in Jun, July and August (Figure 2). As we look at 24 we see that the ratios have narrowed late in the year (Figure 3). Through mid-december 24 the ratio has averaged 2, below the 19 year average. The month of November has averaged 1.43, in the lower 3 percentile of

2 the distribution. Note that since 1998 we have spent little time below 1.4 and the ratio has rebounded to the 2.2 range. The sluggish cattle market in December may be catching up to the strong hog market in November. It is doubtful that hog prices can continue a strong as they have given low or negative packer margins. Likewise, cattle prices typically strengthen into spring, but may have more of a challenge this year given the near record carcass weights and lack of exports Ratio of Cattle to Hog Prices, Live Weight, Monthly Average Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Figure 2 New information that will help shape the cattle and hog markets in the weeks ahead include the December Hogs and Pigs report due out the 29 th and new about cattle and beef trade. On discussions with Japan, a US delegation working on the study to identify a physiological maturity criteria to determine age at 2 months or younger in cattle for export to Japan has collected the data and are in Japan to share the results. We should hear some announcement on their decision in the coming weeks. The rules for importing cattle from Canada are due to be released any day and it is expected to have a 6 day comment period before they go into effect. This schedule could have Canadian cattle imported in February, but the details are have not been released at this time. It is anticipated that cattle imports will be limited to cattle less than 3 months of age directly to slaughter or feeder cattle to designated feedlots for slaughter at less than 3 months of age. Canadian Cattle and Beef Canada has been importing boneless boxed beef to the US since early September 23 following the ban on their imports following the discovery of a cow in Alberta with BSE. Beef imports from Canada through September are 7% above 23, but 5% below 22 the last normal year of trade. In 22 Canada exported 16, feeder cattle, just over 75, steers and heifers for slaughter, and 4, cull or breeding animals. The cull and breeding animals will not be allowed in because of the 3 month rule. November cattle on feed in Alberta and Saskatchewan, the major feeding region in Canada is higher than 23, but was 5% lower than 22. July-October placements were 13% lower than 22 as well. At the same time Canada has increased its slaughter capacity. January-November slaughter in 24 is nearly 1% higher than is was in 22. Thus, Canada has fewer cattle on feed and a larger demand for

3 cattle than it did before. Add in the weaker US dollar compared to 22 and the number of slaughter cattle coming from the Canada to the US will likely be well below the 22 level. Cattle to Hog Price Ratio, Live Weight Figure 3 John Lawrence Export Sales Lag, Large Outside Supplies Temper Corn Prices Cash corn prices across Iowa have been steady for the last few weeks until this week, when prices increased slightly. Futures prices have trended slowly downward through harvest and for several weeks afterward. These patterns are in contrast to normal seasonal tendencies to show strength from the end of harvest into mid-december. Prices have been stabilized by (1) very large piles of corn being stored outside in many areas across the Midwest, (2) export sales that lag behind a year earlier and behind the level needed to attain official export projections, and (3) concern that fear of Asian soybean rust may push some bean acres into corn next spring. Gradually increasing cash corn prices appear likely from January into mid-february as large outside piles are absorbed into the market. Lasthalf February prices have modest down-side risk due to the large amount of LDPs taken on corn. Through 12/8/4, USDA reported that farmers have taken LDPs on 46% of the 24 corn crop. When farmers cash out LDPs, they no longer have access to marketing loans to generate cash and help finance additional storage. With a large number of farm expenses coming due in late February, heavy use of the LDP program may generate slightly above normal farmer marketings at that time. Also, concern over possible Asian rust damage to the 25 soybean crop may motivate farmers to store more soybeans than usual into summer. That may lead to fewer soybeans being sold to pay late-winter bills. Soybean Price Update Soybean prices have been more volatile than corn in the last month, and have increased significantly from fall lows. Slowing Chinese purchases and talk of possible export sales cancellations contributed to weakness after the initial upward reaction to Asian rust discovery. That was followed by reports that China would soon be back to buy more U.S. soybeans. But the driving force in soybean volatility and post-harvest strength has been Asian rust. Discovery of the disease in parts of eight southern states and two counties in the boot heal of Missouri led short speculators (those who had sold soybean futures) to buy back positions, thus putting temporary upward pressure on prices. Also, while soybean export sales lag well behind last year, they are comparable to levels of other recent years when bean exports were at currently projected levels. From now through mid-summer, soybean prices are likely

4 to be quite volatile as farmers and the grain trade react to Asian rust concerns. At least brief periods of modest strength in cash prices appear likely this winter and next spring. More significant and lasting strength would probably require one or more of the following conditions: Deterioration in the current very good South American crop prospects Indications that U.S. farmers will sharply reduce soybean plantings in 25 Actual Asian rust damage to a significant part of the 25 U.S. soybean crop USDA December 1 U.S. and world supply demand report USDA s December 1 report had no changes in U.S. grain production estimates, but did show modest upward revisions in grain production for Canada, the European Union, other Europe, and the former Soviet republics. In the U.S. picture, corn export projections were lowered 5 million bushels from last month, but projected corn processing was increased by 25 million bushels. The net result was a 25 million bushel increase in projected U.S. corn carryover stocks for August 31, 25. Indicated stocks for the end of this marketing year now stand at billion bushels a 92% increase over a year earlier. The grain sorghum export projection was lowered 25 million bushels from last month and projected grain sorghum feeding was increased by 25 million bushels. Grain sorghum competes directly with corn in both the feed and export markets. The U.S. cotton production estimate was raised 1.2% from last month and now stands at 25% above last year. Cottonseed oil and meal compete with soybean products. Projected U.S. wheat exports were increased by 25 million bushels, but were partially offset by a 1 million bushel reduction in food use of wheat. Projected U.S. wheat carryover stocks were lowered by 15 million bushels from last month but are up a very slight 6 million bushels from last year. World Production and Stocks Changes World wheat production is projected to be up 12.1% from last year, with carryover stocks up 9%. Global feed grain production is projected to be up 9.1%, with stocks up 17%. The world feed grain production estimate was raised 211 million bushels (corn equivalent) from a month earlier. Feed grain crop estimates were increased by 34 million bushels each in Canada and Mexico, 2 million bushels in China, and 55 million bushels in the Ukraine. Feed grain crop estimates were lowered slightly for Australia and Russia. World wheat production figures were raised by 46 million bushels. For wheat, the main changes were a 7.8% increase from last month in the Canadian crop and a one million ton (37 million bushel) decrease in Australia s crop estimate. Changes from last year in wheat and feed grain production by country and/or region were as follows: Wheat crop % change vs. 3-4 Feed grain crop % change vs. 3-4 EU Other Europe N.A. +58 Canada Former Soviet republics China Argentina Brazil -6 Australia India +11 N.A. Mexico N.A. -6 World N.A. = not available

5 Figure 1. World Feed Grain Production, Use & Figure 1 below shows the long-term Months of Reserve Supply Beyond Pipeline Needs trend in world feed grain production, use, and reserve stocks. It includes several Prod'n 12/1/4 Use major upward revisions in Chinese grain Old Reserve Revised Reserve stocks since 21. This year s world Revised Reserve production is indicated to have recovered 1,2 Revised reserve 12/1/24 5. considerably from the recent low point 1, 4. two years ago and is expected to bring a 8 modest increase in global stocks Chinese data revisions have made world 4 stocks look much more adequate than in 2 the mid-199s, when corn and wheat prices set all-time highs. Even so, currently estimated world reserve supplies are quite small as a percent of annual use and would be quickly be used up with widespread weather problems. Our estimated world feed grain reserve excludes one month s pipeline stocks-- stocks needed to maintain normal feeding, processing and exporting activities. In case of Figure 2. U.S., Foreign, and World extreme tight supplies, working stocks could be Coarse Grain Exports reduced to slightly less than one month s supply. Source: USDA 12/1/4 U.S. Exports The Old Reserve line shows where estimated 12 World Exports Foreign world feed grain reserve stocks were before the 1 upward revisions in Chinese stocks. There is no way 8 of knowing whether China s stocks will be revised 6 again soon. Mil. Metric tons Figure 2 shows the long-run trend in global, U.S. and 2 foreign feed grain exports. Both U.S. and global exports have been in a downward trend. World exports in the last five years have continued the downward trend, but from a higher level than in the late 198s and early 199s. Foreign feed grain exports have been in a long-term upward trend, with exports in the last three years right on the long-term trend line. Months Reserve Mil. Metric Tons / /8 1984/ /9 1994/ / 12/1/4 Bil. Bu Figure 3. Trends in World Soybean Production & Use world prod'n Foreign prod'n U.S. prod'n World use world Stocks/use Stocks/Use Figure 3 shows this year s projected U.S., world, and foreign production along with world soybean consumption and the global stocks to use ratio. So far, South American production appears to be on track to reach the projection. However, rainfall patterns in the northern part of Brazil s soybean belt will be important in determining whether the projections materialize. Last year, continual rain made it difficult to spray for Asian soybean rust. If the projected South American crop materializes, a large increase in world soybean stocks is expected. Robert Wisner