Rabobank: Grain prices moderating
TWIN FALLS, Idaho — Moderating feed prices, combined with strong demand, has U.S. beef and dairy producers on target for an exceptional year, according to Rabobank analysts.
In the big picture, grain markets are rebuilding and prices have moderated over the last six months and could go lower, said Bill Cordingley, managing director and chief of Rabobank agribusiness research and advisory group.
Rabobank officials are on a tour of the Northwest, speaking to clients about global commodity markets in terms of price and outlook. The tour made a stop in Twin Falls on March 4.
It will be a strong year for U.S. dairy producers and exporters, and the tightening U.S. beef supply will continue favorable cattle prices and provide a big growth market for lean beef, Cordingley said.
U.S. planting intentions and weather will affect U.S. grain prices in the next few months, but it’s too early to tell how production will play out. So most of the volatility in markets is coming from outside the U.S., he said.
“All eyes are on South America and the Black Sea (region)” as well as the U.S. winter wheat crop, he said.
South America’s record soybean crop is challenged by rainy weather at harvest, its transportation infrastructure and logistics in getting it to export markets, and the likelihood of drought in Brazil is decreasing expectations on it second corn crop, he said.
Unknowns are also entering grain markets with the conflict between Ukraine and Russia, rallying contract corn prices to their highest in eight months on March 4. The Black Sea region represents about 20 percent of global wheat exports, 40 percent of barley exports and 18 percent of corn exports, and any volatility there has an immediate effect on markets, he said.
And while world demand for agricultural commodities remains strong, fueled by China’s huge appetite, there is some concern that China’s grain demand will moderate this year. But China also wants to build its strategic reserves, relaxing its 95 percent self-sufficiency policy for feed corn.
“China is very much a wild card,” Cordingley said.
In the medium term, corn (which drives the grain complex in the U.S.) is still on a bearish note. If weather cooperates, there could still be a big crop in South American and a good crop in the U.S., and stocks are rebuilding, he said.
Chinese demand for dairy has turned U.S. dairy exports on their head, whether or not they are going to China. That country’s domestic milk production last year was flat at best, and the country is also dealing with food-safety issues, he said.
That’s given strength to U.S. and global dairy prices, while feed prices are coming down. Income over feed has brought extraordinary returns to U.S. producers, he said.
“It’s a bit of a perfect storm with China’s demand and corn prices moderating,” he said.
Margins over feed costs in the last three to six months have been the best ever seen. But U.S. dairymen are not responding with production growth as they would have in the past, due to a need to rebuild equity and concerns over labor availability, he said.
U.S. milk and ingredient prices will moderate in the second half of the year, with milk production growth here and abroad, and pressure producer margins. But those margins will still be attractive, he said.
U.S. beef is in a tightening phase, with beef production expected to be down 5 percent to 6 percent, a “huge contraction,” in 2014. Current cattle prices are an incentive for slaughter but also for cow and heifer retention, he said.
The challenge to the beef complex will be consumer access to beef and price competition from pork and poultry. The price advantage ground beef had over chicken breast has closed due to a tightening of lean meat for grinding. That tightening is a function of reduced cow slaughter and reduced lean imports, he said.
Some traditional U.S. imports of lean meat have been redirected to China due to China’s demand for the product. China imported 140,000 tons of beef from Australia in 2013, up from 14,000 tons in 2012, he said.
Beef markets are so tight and prices are so high, the U.S. government is considering allowing fresh beef from Brazil on the basis of regional freedom from foot and mouth disease, he said.
An upside pressure for beef is that the PED virus in U.S. swine will limit growth in the pork industry. But red meat prices remain robust, which is supportive for poultry, and could allow poultry to take more market share, he said.