12 December 1997

1998:Good for grain,

poor for livestock?

Quick harvests and good crop yields usually prompt an

inevitable slump in prices. Not so in the US this autumn,

where strong domestic demand is continuing to keep prices

healthy. US commentator Alan Guebert reports

AFTER a slow, cold planting season and a hot-then-cool summer, American farmers enjoyed the driest, warmest – and quickest – harvesting season in a generation.

The odd growing season clipped nationwide maize yields, yet farmers are smiling because US soyabean production shattered all records and wheat production remained steady.

Good crops and a quick harvest usually means US grain prices sink steadily in October as farmers move the bounty into the market. This year, however, the exact opposite happened: Farmers were reluctant sellers and grain prices climbed throughout October.

For example, after the US Department of Agriculture confirmed in its October crop report that soyabean production would be a record 74.2m tonnes, soyabean prices leapt nearly £15/t or about 11%. Maize prices followed suit – climbing 13% in 10 days – despite the fact US farmers produced a 236m tonne crop, the fourth largest ever.

Why all the bullishness now? "One word," says a grain market analyst based in Chicago – "demand."

According to USDA, domestic maize demand for 1997/98 will be 185.5m tonnes. If accurate, that will be a record, topping last years US usage by a fat 7.6m tonnes. Additionally, maize exports are expected to climb more than 10% from a year ago to 55.2m tonnes.

Yet actual maize exports in the new marketing, which began on Sept 1, have been sickly so far. The reason, again, is farmers.

"It appears farmers are storing much of their maize this year," explains Paul Bates, a commodity broker in central Illinois, "because with only average yields and the anticipation of higher usage, most believe prices will climb throughout the winter."

The farmers strategy makes sense: If the world does need maize, foreign buyers will have to come to the US market sooner or later. And with prices already climbing because of strong domestic use, the foreign buying can only drive prices higher later.

The same outlook is pushing soyabean prices higher. In fact, the record crop, guesses USDA, will be quickly gobbled up and next Augusts remaining stockpile will be just 7.3m tonnes. Based on current domestic and export demand estimates, that means the US will have only a months supply of soyabeans left before the 1998 crop is harvested.

And that tight outlook is already tightening. Current 1997/98 soyabean exports are setting a scorching pace – more than 1m tonnes a week, or nearly twice as much as a year ago. Simultaneously, domestic usage is soaring, too, because of increased livestock numbers.

Yet the bullishness in both the maize and bean market might not last.

"I doubt these good prices can continue all winter," reckons Illinoisan Bates. "The South Americans anticipate planting nearly 10% more soyabeans this year and the good prices now will certainly encourage that expansion. Unless new demand comes into this market from someplace like China, we could easily see grain prices weaken as the winter goes on."

Maybe, but the US livestock industry is predicted to chew through a mountain of maize and protein-rich soyabeans in the coming year. USDAs September hog report suggests pork producers will expand their herds by 8% in 1998 while chicken production will grow by 6.5%.

"The bottom line," explains John Harrington, a livestock market analyst, "is that pork and poultry farmers are going to use a lot of maize and soybean meal, but theyre going to be feeding it to animals whose prices are going to slump well into the next year."

Current pig prices prove Harringtons view: In early August, pork prices were a pleasant 68p/kg; today, as the threat of herd expansion takes root, prices are a 50p/kg. And if producers continue to expand, 1998 will shave that modest price.

Long-suffering beef producers have fared little better. It took a freak, late October blizzard that ripped through cattle growing regions in the western US to push cash cattle prices over 90p/kg, for the first time all year.

But even that meager price rise will be attacked shortly. Cattle placements – the number of young animals now being fattened for slaughter from November through February – are at record levels, 8% higher than in 1996 and 18% larger than the 10-year average.

Both cattle and pork growers are trying to put the best face on the poor price outlook. "At least the cheap price will help red meat exports in 1998," says one.

USDA agrees. It estimates 1998 beef exports will climb to 950,000m tonnes, an 80,000t increase from 1997. Most of that increase will likely come from increased Japanese imports. US pork exports will climb from about 500,000m tonnes in 1997 to 550,000m tonnes in 1998.

US dairy farmers cannot look to growing export markets to lift them out of their year-long price hole. Septembers basic formula price, a nationwide measure of farm milk prices, was just 17ppl. While that is better than the summers sickly 15ppl, the September BFP remains 16% below September 1997s price of 20ppl.

And price-dampening dairy stocks continue to build. September US butter stocks, at 14m kg, are 43% greater than a year ago. Likewise, non-fat dry milk stocks at the end of August were a whopping 72m kg, twice that of a year ago.

Says one livestock farmer, eyeing another year of steady, maybe improving, grain prices and what seems to be perpetually poor dairy and livestock prices: "Its no secret why farmers are turning the livestock industry over to the mega-farmers – theres no money in it.

"Maybe this is one of those unforeseen consequences of Freedom to Farm." He might be right.