Feed price outlook: Volatile commodity, feed prices expected to continue
January 7, 2013
Chief Economist of the American Farm Bureau Federation Economic Analysis Department Bob Young spoke during the Wyoming Farm Bureau Federation Annual Meeting in Laramie, WY, on Nov. 16, about the volatile feed price environment agriculture is currently in, what is driving that volatility, and what advice and predictions he has for producers over the next few years.
"When you talk about why we're dealing with the kinds of price volatility that we are in this stage of the game you have to notice corn yields. You can't find, as far back as I could find data, another time when we had three years in a row of below trend corn yields. This is very much an anomaly. Looking back to the previous 15 to 20 years before this downturn was one of the most stable corn yield patterns that you can also probably ever find. Why were we so stable then – why are we talking so much volatility now? That's a good question, and I don't have a clue what the answer is," began Young, adding that while people will state many different reasons, he feels that no one is certain on the actual reason.
Young continued, noting that in recent conversations, people are of the opinion that the unstable trends will continue, creating a very different situation than has been present for the last two decades in respect to crop production and feed costs.
Further adding to the unstable prices, in Young's opinion, is a reduced degree of government controlled stocks of corn through Farmer-Owned Reserve, CCC (Commodity Credit Corporation) Inventories, and various other means and programs.
"In the past when we've had big production declines, for example back in 1988, we just sucked all that grain out of the government stocks. When it came right down to it, we really had almost no real price change from that year to the next. The average price of corn in the 1987 market year ran about $2.25 per bushel, and the season average price in the 1988 market, which is the drought year we're comparing to, ran $2.55 per bushel," explained Young of what occurred in the most recent comparable scenario he located.
Since that time, multiple Farm Bills have been written to get away from the government holding stocks on corn, which has resulted in the crop being completely reliant upon the market to hold its reserves. As a result of being market price dependent in 2012, the U.S. corn crop went from a June 1, estimated value of $4.60 per bushel and a 14.8 billion bushel yield, to an actual price of $7.80 per bushel and a 10.7 billion bushel yield in late fall.
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"When you look forward from where we are at this point, we're going to chew through 13-plus billion bushels of corn a year. We need so much product, it doesn't take much of a short crop to make an impact. But, because we're totally reliant on the market to hold our reserves, if you have two bushels too many, the price will be down. That's the environment we're going to live in over the course of the next four to five years. My corn price forecast for next year is something with a seven or eight in front of it, or something with a three or a four in front of it, and nothing in between," stated Young of his price outlook.
He suggested that in light of the current high feed prices and uncertain future, producers live hand to mouth for the next few months when purchasing feedstuffs.
"However, when we put next year's crop in the ground, it comes up and we start talking about some of these 155-plus bushels-per-acre corn yields, I think you will start to see the price come off pretty quickly when we know we will have a crop. If I were you I would certainly be talking about pricing not just my feed needs for 2013, but I would also be looking at 2014 and even out into 2015," continued Young of his advice to producers as the market breaks in the upcoming year.
In addition to feed usage, ethanol production continues to play a significant role in the value of corn. Young explained that with $90 a barrel for oil and corn coming in 40 cents cheaper per gallon than any other fuel enhancer from an octane perspective, its use in fuel will continue.
"Ethanol is here to stay. The numbers are such that we will continue to shoot through at least 12.5 to 13 billion gallons of ethanol, and right now by far and away the cheapest source ethanol comes from corn, and we will just have to live with that," said Young of the ongoing future use of corn as both feed and fuel sources.
On the livestock side, Young said data isn't supporting rumblings of beef producers culling harder and liquidating herds. Beef cow numbers are fairly steady, and feeder steers are expected to move sideways through the first couple quarters of 2013, with a slight uptake in the third quarter and noticeable uptake in the fourth.
"This is all predicated on a reasonable corn yield and reasonable feed costs, and I would read that as declining feed costs from where we are today. One of the reasons we're obviously going to be well below the first two quarters this year relative to where we were the first two quarters last year is again because of those expectations about feed costs. You can't get away from it; you will have higher feed costs this spring than you had last spring, so you're going to have to pay less for those cattle," explained Young.
For more exact predictions, Young joked that all he needed was an accurate weather forecast through 2013.
"For now, we will have to live with extremely volatile commodity prices and feed costs moving forward. When I say volatile, I'm not joking when I say corn is either going to have a three or four in front of it, or a seven, eight or nine, and it's not going to spend any time in between. As soon as the crop is in the ground and the market breaks, I would be pricing feed needs for several years if it were me – that's the best piece of advice I can give," concluded Young.
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