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Global crises continue to affect markets -- Part 2

Editor's note: The first part of CoBank's April 2022 quarterly report was published in the May 12 issue of Agri-View.

Animal protein sees optimism

Brian Earnest

Brian Earnest

Brian Earnest

Livestock and poultry producers began 2022 by facing numerous challenges. Drought concerns for Western cattle feeders, increased feed costs on reduced South American output, a labor-supply crunch and increased energy prices all suggested an expectation of moderately reduced output despite increasing meat prices. Feeding challenges have most recently been exacerbated by the risk to global grain stocks due to Russia’s invasion of Ukraine. But prices for livestock, meat and poultry have all continued increasing, promoting cautious optimism for producers.

With the exception of beef, protein output has failed to advance in the early stages of 2022. Labor continues to play a role in reduced pork production as 2022 throughput has decreased 6 percent year over year and is 7 percent less than 2020 levels. Weather issues complicated cattle processing early in January, but the weekly slaughter has increased since then; it’s at a 1 percent increase year over year. Likewise broiler harvest has been advancing moderately, with an increase of 1 percent year over year; but it still remains 3 percent less than 2020 levels.

Demand from the food-service sector finally looks to be finding consistency after recovering from the omicron wave of COVID. And as grilling season begins, robust demand is expected to continue pressuring supply despite average retail meat and poultry prices increasing 10 percent in the 12-month period ending in February.

U.S. protein-export values increased by 22 percent during 2021. And while China’s imports of U.S. pork have slowed, we expect exports to be strong again this year as Mexico continues to buy record levels of pork and China keeps buying more U.S. beef.

Chicken adds value

Led by tight supplies and strong demand, broiler-meat values took off at the start of 2022. Values increased 19 percent from four-quarter 2021; they’ve increased 57 percent year over year. Chick placements have been trending slightly less year over year, despite the broiler-layer flock growing by about 0.5 percent year over year. Broiler harvest has decreased about 2.5 percent from peak levels reported in early 2020, suggesting excess plant capacity. With labor still tight and layer productivity remaining dampened, meaningful growth in front-end supplies is not likely to occur before 2023. As a result we expect prices will remain firm throughout the summer, continuing on a prolonged path of profitability despite increasing feed costs.

Chicken prices have firmed, with limited downside from historic levels.

• Boneless-skinless breasts have increased $1.25 per pound year over year and have increased $0.75 per pound since the year began.

• Export leg quarters decreased about $0.05 per pound from where they were for much of 2021, but increased $0.05 from the five-year average of $0.40 per pound.

• After starting the year in the $2.70s, wing prices lost momentum; they’re now hovering at about $2 per pound, which is still a $0.50 premium to the five-year average.

After minimal impact during the past five years, Highly Pathogenic Avian Influenza has again been reported in U.S. commercial-poultry flocks this year. It’s claimed more than 20 million head so far, the largest total since 2015. Losses to date have primarily been for turkey and table-egg producers. There has been minimal disruption to broiler supply but export sales are at risk, with destinations such as China imposing import bans from specific states where outbreaks have occurred.

Beef demand improves

Domestic and export demand for U.S. beef has surged during the past 24 months, supporting prices through the first quarter. Slaughter capacity appeared maxed out in 2021, which limited the sector’s ability to effectively work through market-ready cattle. But following weather disruptions to start 2022, weekly slaughter rates have been impressive lately. February slaughter rates were the strongest since 2000, increasing cumulative harvest by 1 percent year over year and increasing 3 percent from 2020.

With throughput improving, demand for cattle is improving. But increased feed prices and prolonged drought conditions remain a concern for ranchers and cattle feeders, which is encouraging feedlot placements. During February net placements in feedlots increased 9 percent year over year, leading to a record on-feed total – increasing 1 percent from a year ago per the U.S. Department of Agriculture’s latest Cattle on Feed Report.

Given the historically large cattle totals in feedlots, one would expect live-cattle prices would be decreasing. But as the industry diligently worked through a massive backlog of cattle in the back half of 2021, prices have increased more than 20 percent year over year through the first quarter. We expect increased values as seasonal interest grows.

Trade has become a larger part of the balance sheet in recent years. Increased exports to Japan, Korea and China contributed to a 17 percent increase in U.S. beef exports in 2021. We expect exports to remain elevated in 2022, contributing to increased cattle prices for U.S. producers. Overall, domestic per capita beef consumption increased by almost 1 pound in 2021. It’s only expected to lessen moderately this year because of shrinking supplies.

Pork returns profits

The year 2021 was phenomenal for pork. At one point live-hog value as a percent of retail pork value – the portion that the producer received from prices paid by consumer – was almost 35 percent. That’s a level not seen since 2014. Fundamentally, this year appears set to return similar if not better results as retailers scramble for affordable protein options and exports continue to pressure supplies.

Feed costs increased 17 percent year over year for hog farmers but Iowa State University estimates farrow-to-finish operations posted a $21.36-per-head profit for the month of February – increasing $15.73 per head year over year and a $24.24-per-head gain during the prior month. Hog values have gained about $8 per hundredweight since February, helping to offset escalating feed costs.

The USDA’s March 1 Quarterly Hogs and Pigs Report was moderately bullish but continued in line with the last report in terms of implications for the market. The U.S. hog inventory total decreased 2.3 percent year over year, which was more than analyst expectations and the smallest total since 2018 for the same period. Of note, the breeding portion of inventory total decreased almost 2 percent year over year, a five-year-smallest number of 6.1 million head. That will limit production growth in late 2022 and into 2023.

From a trade standpoint, at least near-term, U.S. exports remain robust. But with China’s hog prices plummeting to start 2022, China’s share of export sales has declined. Mexico remains a key destination; it took 43 percent of U.S. exports during January. With European Union pork production struggling, and China hogs in liquidation phase, we expect global opportunity will remain robust.

Cost inflation hampers dairy

Tanner Ehmke

Tanner Ehmke

Tanner Ehmke

Milk supplies tightened further this past quarter as increasing production costs continued to burden U.S. dairy producers. Milk production in February decreased to 17.5 billion pounds, a decrease of 1 percent year over year, with the Northern Plains the only region reporting an increase.

• Class III milk futures increased 25 percent for the quarter, to end March at $23.85 per hundredweight.

• Class IV milk futures increased 25 percent to $24.84 per hundredweight.

Inflated milk prices have stopped the contraction of the U.S. dairy herd. Cow numbers grew modestly in February to 9.37 million cows, stopping an eight-month slide in herd size. But the U.S. dairy herd size is still smaller than a year ago after the loss of more than 100,000 cows since summer 2021. The number of dairy farms continues to contract, now numbering less than 30,000. Historically expensive prices for feed, labor and replacement heifers remain powerful headwinds pushing against expansion of the U.S. dairy herd. Heifer inventories are especially tight and at decade-small numbers.

At its Ag Outlook Forum in February, the USDA predicted modest herd growth in 2022 as producers grapple with ever-growing cost pressures. Rather than add more feed-consuming cows while prices for corn, soybean meal, and hay are inflated, producers are instead focusing on improving productivity of the existing herd as well as culling or replacing low-performing cows. Persistent drought conditions across the western half of the United States portend another tight year for premium alfalfa – and another year of historically expensive hay prices. Surging grain prices resulting from the Russian invasion of Ukraine in an already tight year for world grain inventories hint at more-expensive feed costs in 2022.

But those cost pressures are an international problem; milk production among exporting countries has been declining since September 2021. In New Zealand, milk collections in February decreased 8 percent year over year on exceptionally-dry pasture conditions. The EU decreased 0.7 percent year over year. If the reduced production and increased prices hold for the remainder of 2022, dairy farms should enjoy solid profitability this year.

Processing faces challenges

Dairy processors continue to struggle with extremely tight labor. Some dairy processors and handlers report that severe labor shortages are impacting normal operations. Although automation and technology may solve labor issues in the long term, lead times on acquiring new equipment are 18 to 24 months. The struggle to quickly automate in a tight labor market is slowing the processing pace. The ongoing shortages of truck drivers and increasing fuel costs are additional constraints. Processing plants have not been able to operate at full capacity in regions with declining milk collections, particularly U.S. manufacturers of butter and nonfat-dry milk.

Butter and nonfat-dry-milk prices continued their lofty ascent this past quarter on slowed production and strong exports. Butter inventories in cold storage decreased 25.8 percent year over year in February, while cheese stocks increased a modest 2.3 percent year over year. But as the spring flush commences and tightness in milk supplies eases, processors anticipate dairy-product prices will peak and allow for steadier production schedules. The strong international demand for dairy products amidst decreasing global supplies, though, continues to pull on U.S. exports. That signals strong support for dairy-product prices in the months ahead. Chinese demand will be a central focus in the quarter ahead as policy makers for the world’s largest importer of commodities struggle to contain escalating food prices. Efforts to stockpile commodities may translate into new demand for U.S. dairy products.

Specialty crops face limited water

The drought plaguing the Western U.S. intensified this past quarter – with January, February and March the driest on record following record snowfall in December. Snowpack in the Sierra Nevada mountain range also melted faster than normal in the off-season. The California Department of Water Resources reports snowpack at 38 percent of average as the wet season comes to a close. Growers are now likely facing a year with no state water allocations amid historically low reservoir levels.

Row-crop producers who don’t have sufficient groundwater for irrigation will likely fallow fields, though some will benefit from indemnity payments on no-plant crop insurance. Those with groundwater reserves may profit by selling water to growers with permanent crops like fruits and tree nuts. Record prices for processing tomatoes, pima cotton and potatoes may retain steady acreage for those crops.

Freezing temperatures in February further reduced prospects for the 2022 California almond crop. Temperatures were colder than freezing for several hours just as almond trees were blooming. Freeze damage was greatest in the northern Central Valley, with temperatures setting records. Early estimates put frost damage at about 10 percent. Fortunately, walnuts and pistachios saw minimal frost damage. Nut prices have been hurt as transportation and logistics issues slow exports, raising the likelihood of record carryout at the end of the marketing year July 31. Total almond exports for the current marketing year decreased 21 percent year over year; shipments to China in particular decreased 27 percent as logistical logjams have delayed deliveries past the Lunar New Year peak-consumption period. Uncertainty is also growing concerning European demand, with inflation increasing for consumers there following Russia’s invasion of Ukraine.

California’s grape crush is rebounding from two years of poor harvests, which is increasing grape prices – especially for wine grapes. Total grape crush in the state totaled 3.88 million tons this past year, according to the California Department of Food and Agriculture’s preliminary report. Wine grapes accounted for 3.63 million tons. The grape crush has improved during recent years but the volume is still at less than the 4 million tons crushed in 2019 when vintners struggled with oversupply. As at-home wine consumption increased during the pandemic and with restaurant sales rebounding, wineries are looking for fruit. Wine-grape prices increased more than 20 percent year over year in 2021. Increasing-price momentum is expected to carry through 2022 as the drought raises concerns of ongoing limited grape supplies amid resilient consumer demand.

The USDA estimated Florida’s orange crop at a meager 41 million boxes – the smallest Florida orange crop since 1943. The “Orange State” continues to struggle with citrus-greening disease. Florida orange production has collapsed since peaking in 1998 at 244 million boxes. Imports of fresh-pack oranges, meanwhile, continue to climb. Supply-chain issues for fruits and vegetables have not been as severe because most imports are cross-border trades with neighboring Mexico. The Russia-Ukraine conflict could divert more fruit exports from countries like Argentina and South Africa – previously destined to the Black Sea region – to the United States. That could decrease citrus prices.

Power, energy, water challenge all

Teri Viswanath

Teri Viswanath

Teri Viswanath

Americans are facing a once-in-a-lifetime cost-of-living shock – an oil embargo coupled with rapid inflation. It’s a combination that hasn’t occurred since the mid-1970s. Increasing energy prices have been a primary driver of inflation for more than a year, accounting for about one-third of the headline gain. Recent international sanctions to curb the trade of Russian oil, natural gas and coal seems to be perpetuating a longer cycle where inflated energy costs could keep elevating inflation pressures.

As the world’s largest exporter of oil to global markets, Russia’s disrupted trade may prove most relevant from a U.S. economic perspective. Early estimates suggest that as much as 3 million barrels per day of Russian oil production – or about 3 percent of global production – has been removed from the market. If correct, that shortfall represents the fourth-largest global disruption on record. By comparison, the 1978 Iranian revolution took an estimated 5.6 million barrels per day from the market. The 1973-74 OPEC embargo and the 1990-91 Persian Gulf War removed 4.3 million barrels. Much like the disruptions of the 1970s, oil prices could remain elevated for an extended time – multiplying the effect of increased transportation costs on the U.S. economy.

To combat increasing energy prices, the Biden administration has announced the largest-ever Strategic Petroleum Reserve release of 1 million barrels per day of oil for the next six months.

“The scale of this release is unprecedented; the world has never needed a release of oil reserves at this 1-million-per-day rate for this length of time,” the administration stated. “This record release will provide a historic amount of supply to serve as a bridge until the end of the year when domestic production ramps up.”

Established following the 1973 energy crisis, the U.S. Strategic Petroleum Reserve was intended to maximize the nation’s long-term protection against a national energy-supply shortage that could cause “major adverse impact” on the national economy. In the 45 years of its operation, the current release represents 3.5 times the next-largest draw, which just took place in November 2021. Following the new U.S. pledge, the balance of the International Energy Agency’s member countries agreed to a new release of oil from emergency reserves – underscoring a strong and unified commitment to stabilizing global energy markets. Yet while the global oil markets entered the month on the heels of the largest weekly loss in more than two years, it’s too early to predict that a scenario different from the 1970s will play out. From a practical perspective, the release and sale from the Strategic Petroleum Reserve will no doubt cause some amount of physical congestion on the U.S. Gulf Coast that could limit an even-greater short-term rebalance.

The International Energy Agency acknowledges the coordinated response is taking place “against a backdrop of commercial inventories that are at their lowest level in about a decade, with limited ability for oil producers to fill the gap in the short term.” Consequently a worsening supply crunch could be forthcoming without a greater response by the world’s biggest oil exporters – namely OPEC along with its allies, including Russia.

Energy production

Increasing energy prices have been a primary driver of inflation for more than a year, accounting for about one-third of the headline gain. 

Communications battle increases

Jeff Johnston

Jeff Johnston mug for Agri-View

Jeff Johnston

Cable operators that offer wireless service via a Mobile Virtual Network Operator business model are reporting impressive subscriber growth. In fourth-quarter 2021, Comcast added 312,000 mobile lines, Charter added 380,000 and Altice USA – which is just beginning to emphasize its service – added 5,000. U.S. cable operators in total represented 29.2 percent of wireless-industry phone-net adds the fourth quarter, an increase from 20.9 percent in the third quarter.

Both Charter and Comcast’s wireless businesses are now profitable as standalone businesses, which is an important milestone. Their profitability should increase as their subscriber bases grow, and cable operators begin to offload wireless traffic to their own networks in urban and other high-traffic markets. And it’s not just the tier-one cable operators that are entering the wireless market. WOW! recently announced its plans to offer WOW! mobile powered by Reach Mobile. Bundling cable and wireless service plans gives cable operators a competitive response to the wireless operators’ efforts to take broadband share via their wireless or fixed-wireless offerings.

Both Verizon and T-Mobile have been aggressively building out their fixed-wireless 5G networks as they look for growth beyond traditional smartphone service plans. T-Mobile is off to an impressive start, ending 2021 with 646,000 fixed-wireless customers, an increase from about 100,000 at the end of 2020. T-Mobile aims to have 7 million to 8 million customers by 2025. Verizon expects to have 150,000 customers in first-quarter 2022 – an increase from about 75,000 in fourth-quarter 2021 – and to have 4 million to 5 million customers by the end of 2025.

Visit www.cobank.com for more information.

Brian Earnest is lead economist for animal protein in CoBank’s Knowledge Exchange division. He provides market and industry research for the poultry, pork and beef sectors.

Tanner Ehmke is lead economist for dairy and specialty crops in CoBank’s Knowledge Exchange research division, where his focus is on providing market and industry research for the dairy and specialty-crops sectors.

Teri Viswanath is a lead economist in CoBank’s Knowledge Exchange Division, where she focuses on the energy industry, including the electric distribution, generation and transmission sectors as well as the rural water industry.

Jeff Johnston is a lead communications economist in CoBank’s Knowledge Exchange research division, where he focuses on the communications industry. His work revolves around identifying emerging technologies, business models, risks and opportunities within the industry.

CoBank is a $158 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. It’s a member of the Farm Credit System. Visit www.cobank.com for more information.

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