DTN: Feed costs will be biggest worry for livestock sectors in 2012
January 12, 2012
OMAHA (DTN) – After 2011’s wild ride of record grain prices, feed costs will likely be the biggest continuing concern for U.S. livestock producers in 2012.
Corn futures hit a record high in 2011 in June at $7.99 3/4. Soybeans and wheat didn’t reach new records, but still rose to noticeably high levels. Soybeans hit $14.56 in 2011 (compared to $16.63 in 2008) and Chicago wheat futures hit $8.93 in 2011 (compared to $13.34 in 2008).
Dried distillers grains (DDG), which typically sell at a discount to other feed grains, also rose to set price records in 2011. The DTN DDG spot price average set a record high in mid-November of $219 per ton, as DDG prices typically mirror movement on the corn board.
Consequently, most livestock sectors said that feed costs will be their biggest concern for 2012 and risk management will be the name of the game for everyone. The beef industry is no exception, according to Dan Loy, professor of animal science at Iowa State University.
“Feed is between 50 percent and 70 percent of the cost of production, so that’s certainly a big issue,” he said.
Although Loy predicted the cow-calf sector should do well with profit margins in 2011, he added that producers will still need to look at managing margins, especially in terms of feed costs, and should look for any opportunities to protect those margins.
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Dairy producers are finishing 2011 with the strongest-milk-price year they’ve ever had. Unfortunately, they also experienced the highest-feed-cost year they’ve ever had, according to Mark Stephenson, director of the Center for Dairy Profitability in Madison, WI.
Dairy producers will want to concentrate on margin protection in 2012, he said, but added that producers should not expect the kind of downturn experienced in 2009.
“If producers can find margins in futures programs or risk management strategies, I would encourage them to think about it,” he said. “Look for margin opportunities and protect yourself if you can.”
Input costs are also a concern for chicken producers, according to Bill Roenigk, senior vice president for the National Chicken Council: “2011 was financially one of the worst, if not the worst, for the chicken industry.”
Roenigk added, “We produced too many pounds, and feed costs, especially corn, were high throughout the year. That made it difficult to make a profit. No one made money.”
Jon Mabry, director of the Iowa Pork Industry Center and professor of animal science at Iowa State University, said risk management for marketing and inputs will be vital for pork producers in 2012 as well.
“Producers will want to use risk management tools to guarantee prices when they market, as well as to take the risk out of the cost of corn and soybeans,” he said, adding even with high production levels, producers can still lose money if they don’t manage their input costs or market correctly.
Livestock producers should also be prepared to monitor the world and U.S. economies and how they could affect the U.S. livestock sector, experts said.
Questions about global economic issues and debt failures in Europe could put a damper on worldwide demand for dairy products, especially if the world goes into another recession, Stephenson said. When economies are weak, consumers get conservative on expenditures and dine out less. That changes the pattern of dairy product consumption away from cheese, creams and butters and more toward beverage or fluid milks, he explained.
Chicken producers will also want to watch the U.S. economy, especially as it affects consumer spending on food service and restaurants.
“About half the chicken we produce goes to supermarkets, the other half to restaurants,” he said. “Restaurant demand for chicken is closely tied to the economy. When there are more jobs and the economy is re-energized, people go back to restaurants.”
Some experts expressed concern about a new farm bill in 2012.
If a new farm bill is passed, a measure that would be the most likely starting point for discussion for dairy producers is their access to margin insurance. However, the measure would also obligate them to participate in what’s being labeled a “soft supply management program,” which Stephenson fears could serve as a disincentive for growth, at least in the short run.
He added that there is also talk of significant reforms for federal milk marketing orders, such as changing the use of dairy product price surveys as a means of price discovery.
Uncertainty for swine producers could center around policies, such as the effect of ethanol mandates on corn prices, trade restrictions or new regulations from government agencies such as the Environmental Protection Agency.
“The industry could be influenced by policies that producers have no control over,” he said. “This will also be an election year, so there are some people concerned about that.”
Beef prices at historically high levels will be good reason for the beef industry to be optimistic. However, that could cause concern for the cattle feeding sector as there will be fewer feeder cattle available, resulting in issues related to excess bunk space and capacity, Loy said.
With fewer cattle, national beef totals will likely take time to rebuild.
“Even if producers begin to keep their starter heifers, it will be at least two years before we see much movement in the national herd,” Loy said. “It will be a slow process.”
Stephenson said the national dairy herd should remain fairly stable next year. After a large decline in 2009, productivity has increased and has actually outgrown domestic population growth.
After U.S. chicken producers produced too many pounds in 2011, companies that lost money have adjusted production to get the supply of chicken in better line with consumer demand. Roenigk predicted production should grow about 2 percent in 2012.
As far as national totals of pigs, the sow herd should remain fairly stable with no large increases, but Mabry added that stable herd totals doesn’t necessarily mean less product.
“Even if we keep the same number of sows, but get more efficient in production, we will end up with more product to sell,” he said.
Most livestock sectors also predicted some moderate growth in exports in 2012.
Loy expects a strong year, as the demand for U.S. beef in export markets is very positive.
“Export trends over the past year have been a very bright spot in demand for beef,” he said. “Whether exports continue on the current rate of increase is the question, but all indicators and experts I talk to suggest export markets will continue to be strong.”
The coming year will likely bring weaker milk prices, probably between $1.50 and $1.75 lower per hundredweight than in 2011, Stephenson said. Milk production increases will result in extra milk putting pressure on the marketplace, and strong production years in Australia and New Zealand may dampen opportunity for export growth, Stephenson said.
Chicken exports should increase by 4-5 percent, as there is currently strong demand for U.S. chicken, especially in Asian countries. The economies in China and Korea are doing better than the U.S., and even some African countries, such as Angola, that have some oil money, Roenigk said.
“When people get extra money, the first thing they want to do is put food on the table, especially animal protein and chicken is a good value. We benefit from that trend,” he said.
The U.S. should be able to maintain its pork exports or even see moderate growth, likely from Asian countries, Mabry said.
Editor’s Note: Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the third story in a series where DTN continues to look ahead at what farmers can expect in commodity markets, farm finance, land prices, ag and the environment, agricultural policy, crop input prices and livestock prices. Feedback on what you think the year will be like is welcome at firstname.lastname@example.org.