Farm-supply prices varied
In the short-term fertilizer prices should increase steadily into the spring planting season. Prices for the three major macro-nutrients have increased with corn prices, with no immediate slowing expected. Farmers are steadily applying fertilizer to replace nutrients from the previous year’s bumper crops and prices remain low from a historical perspective. Also no major changes to crop acres are expected, with corn acres projected to remain at about 90 million acres, keeping fertilizer demand steady.
Two countervailing factors will impact nitrogen prices. On the one hand U.S. nitrogen fertilizer-production capacity is forecast to grow this year, which will put downward pressure on prices. On the other hand Chinese fertilizer production and exports are expected to be less this year. That’s a result of China shifting natural-gas supplies from industrial users to residential users, as well as the government’s crackdown on industries that are major contributors to China’s pollution problem.
Phosphorus in the form of monoammonium phosphate and diammonium phosphate is leading the way to increased prices. With large corn yields and the same corn acreage expected in 2018, growers will need to recharge phosphorus levels in their soils for the following soybean crop. And phosphorus production cuts in the United States and in China will support prices in the short run. But to the extent that acres shift out of corn or major producers bring production back online, further price increases will be limited.
The potash market will be well-balanced going forward. No major changes have been reported since the merger between Potash and Agrium closed. But that will be closely watched in the months ahead. While the two other major mergers in the seed and crop-protection industry have long since closed, Bayer and Monsanto plug away at obtaining regulatory approval in the U.S. and elsewhere. Most recently they have received the green light from the European Commission. That required Bayer and Monsanto to make additional divestments, including the sale of Bayer’s vegetable-seeds business to BASF, the sale of Bayer’s hybrid-wheat business, and granting BASF exclusive access to Bayer’s digital-farming data. Monsanto has also agreed to sell its NemaStrike product. Meanwhile Bayer stated that negotiations with U.S. anti-trust regulators are behind those with the EU, and sources indicate that U.S. regulators may require additional divestments. As a result that merger is unlikely to close in time to impact the industry until the second half of 2018.
Animal-protein market strengthens
Strengthening demand both domestically and abroad was the unifying theme across the animal-protein complex in the opening months of 2018, setting a tone of optimism for the year ahead. Robust global and domestic demand boosted profitability for animal-protein producers in the final months of 2017, with the momentum continuing to be driven by the strength in the U.S. and world economies.
Meat and poultry production also continue to increase steadily. U.S. output is expected to reach record levels in 2018. Total meat and poultry supplies are projected to grow by 3 percent to 4 percent, eclipsing the 100 billion pound mark for the first time – about US$143 billion. The persistent production growth places greater emphasis on the export side of the equation. Several key trade agreements, though, remain in the balance amid rising threats of trade protectionism. Any disruption to export channels would create an oversupply situation in the United States, resulting in price pressure and margin compression. Assuming there is no significant fallout from trade policy, an improving net trade balance should limit the per capita supply increase to a more modest 2.5 percent.
Beef market reflects robust demand
Robust demand surprised the beef market throughout 2017 and created profit opportunities for every sector in the beef supply chain. In order to maintain profit opportunities in 2018, demand growth must be steady to increasing, especially in the face of increased output. The U.S. cattle herd continues to expand, albeit at a slowing pace. According to the latest U.S. Department of Agriculture-National Agricultural Statistics Service’s Cattle Inventory Report, the beef-cow inventory grew 1.6 percent to 31.7 million head in 2017. But revisions to the 2017 calf crop have slightly reduced beef replacement heifers – a strong indication of slowing herd expansion. Pasture and range conditions as well as profitability at the cow-calf level will be the major determinants in assessing herd expansion moving forward.
The ongoing drought conditions in the Central and Southern Plains remain the biggest threat to herd expansion. Should the drought worsen, the cow herd could shift and the flow of feeder cattle into feed yards could increase. Moisture conditions will also play a large role in producer decisions to retain replacement females. The conditions could affect overall beef-production levels later in 2018. Beef production is expected to grow by 4 percent to 5 percent in 2018, outpacing the more modest increases expected for pork and poultry.
Cattle slaughter has increased 2.5 percent year-to-date, with a slight increase in carcass weights boosting overall production as compared to the previous year. Increased consumption of beef at lower prices will help offset supply-side price pressures. Flat to declining retail prices should assist in clearing more volume amid greater competition in the meat case. Excellent packer profitability has supported aggressive marketing of cattle and kept the front-end inventory more current than previous years. While meat demand is expected to remain robust, weakness in variety meat and hide values are compressing packer profitability in the short term.
The cattle-feeding segment was the beneficiary of aggressive buying by packers throughout 2017. Looking forward, crush margins look good for the remainder of 2018. Demand will play a critical role in keeping the pace of cattle moving through the system and keeping front-end supplies current. Drought conditions on the plains increased the flow of lighter-weight feeder cattle entering feed yards from late 2017 into the opening months of 2018. Cattle inventory at feed yards increased 8 percent year-over-year in January. The quickened pace of placements will likely slow in the second half of 2018, dragged lower by the lower estimate of the 2017 calf crop.
Retail beef prices have remained steady while featuring activity has increased. But rising output will pressure prices in the months ahead. Growing pork and poultry output will drag on beef prices as competition grows for consumer dollars. Strong U.S. beef exports, meanwhile, have continued to buoy beef prices. While a strong U.S. consumer base insulates the market from oversupply pressures, it does not completely eliminate the risk.
Total beef exports in January increased 9 percent in volume and posted an impressive 21 percent surge in value year-over-year. Beef exports are forecast to increase 3 percent to 5 percent year-over-year in 2018, with Asian markets driving the growth. But trade uncertainty remains an ongoing risk amid trade negotiations with key destinations such as Canada, Mexico, Japan and South Korea.
Pork production increases
As new pork-processing capacity comes online in early 2018, market dynamics in terms of the leverage position between producers and packers is playing out as expected. Robust packer profitability throughout the second half of 2017 and the desire to efficiently operate expanded capacity has supported elevated slaughter levels and supported producer prices. Pork production has increased 2.8 percent year-to-date and is expected to increase 3 percent to 4 percent annually in 2018. The combination of a growing breeding herd and investments in additional market-hog growing facilities during the past two years are resulting in increased production.
Production efficiency gains are also boosting pork output in the United States. With demand growth limited in the United States, continued global demand growth is necessary to support current advances in production. About one-fourth of all U.S. production is destined for the export channel. The growing dependence on exports has only heightened the risk of an oversupply situation in the United States.
A natural transition is expected during the next two years as newer and more efficient packing facilities replace existing outdated plants. Any disruptions in exports could result in domestic-supply increases and compress margins across the entire supply chain. Pork exports are off to a steady start and projected to increase 2 percent to 4 percent year-over-year for 2018. January volume is on par with 2017 while value increased 7 percent, but the growing threat of international trade spats continues to loom over the market. Widespread export growth is buffering the industry’s trade concerns. Central America, the ASEAN region and Oceania all experienced healthy volume increases in January.
China, which remains the driver of the global pork market, is increasing domestic production, which is dampening its import demand. If enacted, China’s proposed 25 percent tariff on U.S. pork products would put European exporters in prime position to gain more market share from the United States. In 2017 China accounted for 13 percent of total U.S. pork exports.
Poultry expansion limited
U.S. broiler production has softened year-to-date and is projected to increase 3 percent annually in 2018. A slight increase in bird weights has boosted overall output in early 2018, but decreased productivity of the hatchery supply flock will limit expansion opportunities in the year ahead. Cheap and abundant feed supplies along with robust consumer demand continued to bolster integrator profitability in the opening months of 2018. Expectations for further demand growth in 2018 are driving the optimism for further increases in chicken value. Rising supplies of competing proteins, though, may cap meaningful price appreciation.
The outlook for integrator margins has been lowered recently as supply competition builds across the animal-protein sector. The major production categories of whole bird, cut up and deboning are expected to post an average margin of 5 cents per pound throughout 2018.
Concerns regarding bird flu have dramatically declined this year, largely due to enhanced biosecurity that has been established during the past three years. But migratory patterns in the coming spring months still pose risk of a potential outbreak in the United States. Given the success of biosecurity protocols in recent years, the industry is confident about controlling exposure from potentially infected migratory waterfowl.
Greater availability of total meat and poultry in the United States has intensified, featuring activity at retail and restaurants. Whole birds, breast meat, tenders and wings will benefit from that activity in the form of increased volume and a level of price support. The wing market is expected to remain volatile as price tends to quickly react to major promotional activity. Dark-meat values are improving due to continued global demand growth and are even seeing some support in the growing domestic market for deboned dark meat. Export demand, though, is off to a slow start in 2018. January exports decreased 1.5 percent compared to the previous year. Broiler exports are expected to increase modestly by 2 percent to 3 percent annually in 2018. A weaker dollar will be a tailwind for exports that gives global customers more purchasing power. For U.S. integrators, the vast diversity of export destinations will be a major advantage over competing meats and other countries.