Anyone in production agriculture has a strong optimistic streak. It’s essential for anyone planting a seed, breeding a sow or entering calving season; after all, there’s a never-ending supply of obstacles that can wreck havoc with your best laid plans.
Certainly after the last couple of challenging years, protein producers have a right to rekindle even more of that optimism as their ledgers finally turn from red to black. But while they have the right to be optimistic, hopefully it includes healthy dose of caution.
I’ve had more than one person suggest “now that producers are making money again” purchasing patterns are going to change or their money will flow freely. Pork producers for one have lost $6 billion in equity over the past 2.5 years, and that foundation needs significant rebuilding to ensure it doesn’t crumble beneath them again. April’s average $29.39 per-market-hog profit is a good start, but there needs to be many more months like that.
I know that lenders remain nervous as their daily phone calls from farmer clients have dwindled dramatically with the turnaround in profits. The concern is that farmers who have been on guard for so long, will relax too quickly.
“Just because cattle prices are soaring doesn’t mean it’s time to abandon risk-management plans,” emphasizes Derrell Peel, Oklahoma State University livestock marketing specialist. “Plenty of factors could make this a volatile year for producers, processors and retailers.” And that doesn’t apply just to cattlemen.
The protein sector—dairymen, cattlemen, pork producers, even the chicken folks-- finally reeled in production to a significant degree, and this year’s supplies will be tighter than in the last few. While protein’s wholesale costs are higher today, that hasn’t filtered through to retail, so there’s been no push back—yet. While U.S. consumers have become more cautious shoppers, low retail protein prices have offered some of the best values around. That’s about to end. The big unknown is how consumers will respond to those higher prices. Meanwhile, protein foodstuffs will not be the only price increases U.S. consumers will face.
The U.S. economy appears to be improving, although the global economy remains fragile as is evident from Greece’s woes and the European Union’s reluctantly proposed “bailout” plan. That will be a lingering problem as one British reporter points out, “there is no Euro government, no treasury, no common political system or directive.” His point is that’s why it’s different than the United States’ financial struggles, and why challenges there will linger. Given that we all live and work in a global economy, problems in one area trickle over to others.
Pork, beef and chicken sectors all increasingly rely on exports for a significant share of their profit margins and the export market is a fickle place. As supplies tighten, prices rise and depending on the U.S. dollar’s strength, export sales are especially vulnerable.
Premature expansion is what has lenders and economists holding their breath. Logic would suggest that any growth in the protein sector would come slow, yet just last week Pilgrim’s Pride officials announced plans for a 10 percent production increase. Such is the business wisdom of a company that just this past December emerged from bankruptcy. The market didn’t like what it heard and took it out on other related companies as well. Sanderson Farms is another major player that’s planning a new chicken complex in North Carolina. All this comes at a time when Russia has turned its back on U.S. chicken. But, chicken wants to re-capture its go-to meat position in both retail and foodservice. In the end, there could unfold a literal game of chicken as companies, farmers and even protein sectors try to jockey for the lead position in the profit recovery. Of course, that could end up damaging the overall profit recovery.
No country or food sector operates in a vacuum. There is still much uncertainty on the input side—feed, fuel, fertilizer, capital costs-- and output side of protein production. Be careful not to get lax with risk-management plans to address market volatility, rather be diligent in reviewing and modifying them as market conditions change.
Protein producers have earned the right to be happy and optimistic, but be wise and cautious as well.