Feed prices tethered by the economy

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Rod Hissong has found that a positive outlook is important in tough economic times. It not only helps him weather the challenges of his family’s 1,600-cow dairy operation, but as president of the Professional Dairy Managers of Pennsylvania he knows that others are looking to him for encouragement and leadership.

“Having a positive attitude is what it’s all about,” he says.

And, that carries over to his business.

“I don’t think the next six months will decide whether I succeed or fail,” he adds. “I think what I have done over the previous two years is even more important. We’ve been preparing for this downturn since the last upturn.” 

There are a few “silver linings” out there, he acknowledges. Certainly, the tough economy has brought about a renewed emphasis on efficiency. It puts more emphasis on things that dairies can do to control their own destiny, such as improving the quality of homegrown forages.   

And, feed costs have come down from last summer. Hissong figures that his have dropped 10 to 15 percent on a per-cow basis, which is a silver lining in itself. 

A new “normal”

Of course, comparing things to last summer can be misleading. Corn and soybeans were at record highs last summer. Almost anything would seem advantageous by comparison.

Feed prices are still higher than a lot of people would like to see them. Nearby corn futures were trading at $3.50 per bushel in early March. Even though they are down considerably from last summer, they are well above the historical averages of $2 to $2.50 that characterized corn for decades.  

Isn’t it stretching things a bit to call this a “silver lining?” No, because some things have happened that could keep a lid on commodity prices into the foreseeable future.

When the national economy went sour last year, it had a profound impact on the commodity futures markets. People who invested in commodities moved their money to safer investments like treasury bills or cash. As a result, corn and soybean futures experienced their own meltdown.

The economic recession, which is global in nature, also put a damper on exports. Ethanol production continues to grow in spite of low crude oil prices, but that growth could slow in the coming years.

These are some of the underlying factors in a new U.S. Department of Agriculture report entitled, “USDA Agricultural Projections to 2018.” The report sees things settling down in the coming years compared to the wild price spikes that occurred in 2007 and 2008 when corn was hitting $7 and beyond.  

Over the next several years, USDA projects that cash corn will range from $3.65 to $4 per bushel, on average. Again, those are relatively high prices compared to five to 10 years ago, but they may usher in a new sense of stability. 

“We’re looking at a much higher maintained corn price, and the same can be said for wheat, soybeans and many of these commodities,” says Paul Westcott, agricultural economist with the USDA’s Economic Research Service.

Exports slowed by recession

Corn exports will be down this year, which will put a damper on price. Last year, corn exports hit a record 2.45 billion bushels. This year, USDA estimates they will drop to 1.9 billion, a 22.4 percent decrease. And, that may be optimistic unless trading activity picks up from the sluggish pace it has shown earlier in the year. 

There’s no question that corn exports will be down significantly; the question is how much, notes Marty Foreman, senior economist with Doane Advisory Services in St. Louis, Mo.

The global economic recession, coupled with a stronger dollar abroad, has created this situation. A country is less likely to step up its dietary standards when its economy is in decline, which means less meat and the grain needed to produce that meat. 

No one knows how long the current economic recession will last.

In its report, “USDA Agricultural Projections to 2018,” USDA has corn exports going up over the next several years, but not by much.

“Their numbers look pretty conservative to me on the demand side,” Foreman says. For instance, USDA projects that five years from now, corn exports will be 2.1 billion bushels, which is pretty close to where they are now.

“We (at Doane Advisory Services) are more bullish on exports, assuming this doesn’t turn into a depression and last a long time,” Foreman says. Doane projects corn exports will be 2.275 billion five years from now, with the United States in a position to help fill increased worldwide demand. 

Can’t predict the weather

As long as the ethanol industry receives financial incentives from the government, it will continue to be an important player — and large consumer of corn. Yet, the report “USDA Agricultural Projections to 2018” projects that ethanol growth will slow down from what we have seen the last five years.

This year, the USDA projects that about 3.6 billion bushels of corn will go into ethanol production, and that will increase to about 4.6 billion bushels five years from now. The sheer year-over-year increase in the amount of corn going into ethanol will level off from the steep growth curve that occurred in the years 2003 through 2008. That, in turn, will allow the industry to adjust even further in making sure there is adequate corn to meet everyone’s needs.  

Of course, there’s one thing that no one can predict with certainty, and that is the weather. Bad weather could lead to short crops and higher prices.

“As long as we avoid a short crop, prices will stay down,” points out Doane’s Marty Foreman. Yet, even a global recession won’t prevent prices from going back up again if there are significantly reduced crop yields.

That proved true in the Great Depression. Despite the gravity of the overall economic situation, corn futures prices rose significantly from January 1932 to January 1933 and then again to January 1934 because of short crops.

Therefore, “silver linings” — in the form of lower commodity prices — can be as fleeting as the clouds themselves. It’s best to enjoy them while they last.

And, you have to be able to spot silver linings when they occur. That is where a positive attitude comes in handy.





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