AgriBank chief economist speaks with livestock producers
By Carol Stender
cstender@agrinews.com
Date Modified: 02/04/2010 9:17 AM
E-mail article | Print version
WILLMAR, Minn. — Hedge, hedge, hedge. That's what James Kielkopf suggests animal agriculture has to do with price risk to thrive over the next few years.
The chief economist for AgriBank made the comment at the Strategic Animal Ag Conference in Willmar and described how each livestock sector is faring during the economic recovery.
Pork experienced its third consecutive year of negative production margins in 2009, he said. It got a triple hit with high costs, the recession and H1N1.
Producers were slow to reduce herd size to meet the lower than expected demand, he said. Some large operations faced liquidation. When the herd reductions did occur, hog prices recovered and the industry looks to be profitable in 2010.
He is cautious about production. Margins are going to get tighter every year, he said. Producers have to be willing to innovate just like any other sector in the economy.
Pork exports 20 to 24 percent of its product while beef is more dependent on domestic markets.
Normally, beef does well during recessions but that wasn't the case this time.
Herd size is declining but may supplies are stable. Feeder cattle prices are up. Declining beef production will help with prices, he said.
Margins for beef producers have been negative since 2003. Forward contracting is the way to go.
Dairy had the worst markets in 2009 of all livestock sectors, Kielkopf said.
Supplies are tighter in 2010 due to buyouts and herd reductions. Some larger dairies in the Midwest did increase herd size but herds are typically smaller than a year ago.
There were casualties in the dairy industry, but, with the buyouts and reductions, prices have rebounded.
Midwest dairies are favored over the California model as the Midwest has greater availability of feed.
"Dairies with disciplined risk management practices, however, could have remained solvent in any area of the country," he said.
Kielkopf said it was distressing to see many dairies take risks when prices went up. Many did it looking at how their grandfathers and fathers took risk at times of high prices.
"The way I see it, if you are building a several thousand cow operation or several thousand hogs, you aren't' farming like your granddad did," he said. "This is a factory operation with lots of variables and it means to control risk and that includes inputs and outputs. If you are diversified, you can play the market more but if you are a large confinement facility, you have to hedge yourself with the costs."
Even the poultry market experienced a downturn in 2009.
Like the other livestock sectors, the demand for poultry was lower due to the recession. There are nigh stocks in cold storage with producers facing negative margins. Some large producers are leaving the business or reducing production because of it, he said.
There's an expected modest improvement for 2010 for poultry prices and margins due to reduced supply.
For the first time in three decades, poultry consumption dropped.
Of all types of poultry production, broilers have been the least affected by the recession, he said.
Exports are important to all livestock sectors, but pork and chicken have faced especially tough challenges in the last year. Russia banned U.S. chicken imports in January, Kielkopf said.
At issue is the U.S.'s processing procedure which gives the meat a light chlorine rinse. Food researchers say the practice is the safest way to stop food borne illness. But Russia says it doesn't want the rinse for either poultry or pork.
The European Union has banned U.S. poultry since 1997 because of the practice. The policy faced a reversal as the Transatlantic Economic Council, set up in 2007 to reinvigorate EU-US economic relations, wanted to allow businesses sot use four currently banned anti-microbial substances to decontaminate poultry carcasses. The substances had been cleared by the European Food Safety Agency and said the poultry carcasses would need a rinse with potable water after treatment removing any possible residues from the final product.
EU states threw out the commission's plans.
Kielkopf calls the move not one based in science, but one that is geopolitical.
A strong local foods movement in parts of EU has severely cracked down on foreign imports.
Pork is different, he said. About 6.5 percent of the pork consumed in Russia comes from the U.S.
Overall, meat is seen as a luxury item in some diets around the world. The U.S. itself is in a slow economic uncertain recovery with unemployment remaining high and a depressing demand for high value ag products, particularly animal products.
Both pork and broilers could suffer in the first quarter, he said.