The outlook for agriculture and the livestock sector in particular continues confounded.
A new report from the Kansas City Federal Reserve Bank says U.S. Farm income continues to decline as crop prices have dropped and inputs risen, and also notes "recent" weakness in the livestock sector.
Nathan Kauffman, assistant vice president and Omaha, Neb., branch executive of the Federal Reserve Bank of Kansas City, wrote in the KC Fed’s latest "Ag Outlook," that farm income in the Fed's 10th District began to decrease in mid-2013. He quoted data from the Kansas City Fed’s "Survey of Agricultural Credit Conditions," noting that since then, bankers have reported further declines, and that the fourth quarter of 2015 was the 11th consecutive quarter of lower farm income in the district.
Beef consumption is expected to increase, but at the cost of lower beef pricing -- all the way down the production chain. USDA predicts Americans will eat an estimated 54.3 pounds of the red meat this year -- the first increase since 2006 and about half a pound more per person than in 2015.
Cassandra Fish, risk manager and columnist, in recent days proposed retail beef business could pick up in the summer. She said, "Coming off a good Q1, the packing community will likely continue to keep kills up and perhaps, perhaps retailers, seeing a plentiful supply of beef, priced cheaper than a year ago on almost all items, will prepare to feature beef more aggressively this spring than seen since pre-2014. Retail ground beef prices specifically, have room to move lower given the extremely cheap end cuts in the carcass."
On the downside, however, competing meats have ramped up production and continue outcompeting beef for market share. For example, USDA says diners are projected to eat more than twice as much chicken, turkey and pork this year.
Kansas City economist and consultant Bill Helming tracks this beef market-share decline and reported in his most recent newsletter that from 1976 through 2015, U.S. chicken consumption increased 117%, while beef dropped 43%. In that 39 years, pork consumption increased 10%, turkey 80% and seafood and fish by 10%.
Helming highlights, too, the ever-increasing consumption of ground beef as a percentage of all beef consumed and the ever-decreasing consumption of whole-muscle cuts. All this ultimately results from beef's high relative price and has nothing to do with quality or taste, he says.
Corn continues in the doldrums, which is good for beef producers because it tends to hold a lid on all feed prices. The March 31 plantings report from USDA said farmers planned to plant 93.601 million acres of corn this year, up 6.4% from last year, and the most corn acres since 2013. That added to downward price pressure.
Farm Futures Senior Editor Bryce Knorr this week said, "Corn’s prospects dimmed on USDA’s acreage estimate. While weather and low prices should mean growers plant less, buyers will be in no rush, especially for old crop. Don’t expect significant rallies until the growing season."
Cattle sliding slowly
Beef prices are not near past their bear market phase, either. At the annual CattleFax seminar in San Diego earier this year, CEO Randy Blach said, “A large portion of the market down-trend is over now. However, the cycle shows prices continuing to trend lower in 2016, 2017 and 2018.”
Cattle-Fax analysts predicted cattle feeders will make slim profits this year, stocker operators will face tight margins, and cow/calf producers will remain profitable. They expect fed cattle prices to average $130 to $135 per hundredweight.
Helming, a contrarian by nature and thinking, projects declining cattle prices may end the expansion phase of this cattle cycle as early as next year.
He added, "Between now and the fall of 2018, fed cattle, beef calves and 3- to 6-year old bred beef cow prices will have declined by at least 50% from the high-water mark in late 2014 and early 2015. These realities will put the brakes on U.S. beef cow and cattle inventory increases and expansion during calendar year 2017 and the first half of calendar year 2018 at the latest and U.S. beef cow and beef cattle inventory liquidation will start again within the 2017-2018 time period."
On the macro-economic level, beef producers face a difficult economy in the U.S. and worldwide.
China's centrally-planned and badly bubbled economy is looking every more ready to burst, and as China goes, so it signals problems in the U.S. and the European Union, which are the ultimate funders of China's economy.
The Federal Reserve Board keeps saying the U.S. economy is heating up and must be slowed, but GDP remains at depression levels and the books on unemployment are so thoroughly cooked they tell us nothing at all.
A recent article in Investor's Business Daily explains but again how the unemployment rate reported by the federal government is designed to mislead and that the real unemployment rate is at least twice, or quite possibly much more, than the government's reported 5%. David Stockman, the Reagan-era budget guru, has taken these reports to the woodshed on more than one occasion. Most recently, he gave the federal government's job's report a thorough whipping.
Poor cash flow
Fed banker Kaufman said agriculture's need for financing and the potential for future financial stress continues to increase. Kauffman said he expects loan demand in the 10th District to increase again in the first quarter of 2016, which would be the third consecutive year in which lending needs in the farm sector increased relative to the previous year.
He added that bankers responding to the fourth-quarter survey said they expect loan renewals and extensions to continue to accelerate. Conversely, the rate at which loans are repaid at agricultural banks in the district is expected to soften further.
Persistently strong loan demand at agricultural banks has been coupled with reports of increasing use of the U.S. Department of Agriculture's farm loan programs through the Farm Service Agency (FSA). From 2013 to 2015, FSA loan volumes increased more than 40%. Consistent with bankers’ recent anecdotal reports of increased use, about 55% of FSA funds available for operating loans had already been used between October 2015 and mid-March.