Many Forces At Work Driving Agricultural Commodity Prices

Beef outlook still very strong while crop picture remains a mixed bag.

Published on: Sep 23, 2011

Ranchers should be looking at strong beef prices for some time, while crop producers face a mixed outlook.

The livestock picture is good news for Texas, as cattle and calves represent more than half of the state's total agricultural cash receipts. The trouble is—the state needs many months of rain to replenish torched pastures and rangeland to take advantage of strong prices.

"We have the fewest cows in 50 years," says David Anderson, Texas A&M AgriLife Extension livestock economist, College Station.

Historically, cattle prices are pressured in the fall as many cattle go to market. But that didn't happen this year, Anderson notes, as the "fall run" already happened before fall even arrived because of Exceptional Drought in Texas. Anderson says that means you are not going to see cattle marketing soften beef prices this fall.

CATTLE REMAIN TIGHT.  U.S. cow numbers are at their lowest in 50 years, and demand for beef is brisk. Among commodity prices, beef is expected to remain strong for several years. But rain is so desperately needed in Texas for pastures, rangeland and stock water.
CATTLE REMAIN TIGHT. U.S. cow numbers are at their lowest in 50 years, and demand for beef is brisk. Among commodity prices, beef is expected to remain strong for several years. But rain is so desperately needed in Texas for pastures, rangeland and stock water.

Derrell Peel, professor and Extension economist, Oklahoma State University in Stillwater, agrees. He says rebuilding of cattle herds will take years.

"The U.S. cattle herd will be tight for the next five or six years," Peel predicts.

Peel also notes decreasing beef supplies and strong demand will impact consumers for the next three to four years as they can expect higher beef prices.

Feedlots got a recent boost in cattle numbers simply because of the drought-driven sell-off. But the cattle remaining out in the countryside are the lowest since statistics have been kept as the record drought forced them off pastures and on to feed yards, Anderson adds.

Peel concurs.

"The feedlots are going to be chasing cattle, and they are going to be harder and harder to find," Peel assures.

In fact, feeder cattle supplies are the tightest they have been in 20 years.

Typically, winter wheat pasture in Texas and Oklahoma would provide a brief home and forage to graze many cattle, but not this winter if rain doesn't come—and lots of it—in the early fall.

In fact, Texas A&M's Anderson notes that on the average, some 1.5 million to 2 million cattle are placed on winter wheat pasture for grazing.

If that pasture isn't available this winter to get some stocker cattle to spring, then you can expect the beef supply to be just that much tighter than it already is.

OSU's Peel says that boxed beef (Choice 600-pound to 900-pound carcasses) was higher in summer 2011 than summer 2010. Peel says that overall, boxed beef prices were about 18% above year-earlier prices—whatever the cattle.

Peel also expects the hamburger market to stay strong for a long time.

China and India big players

The rapidly developing nations of the world, especially China and India, are having a major impact on the world and U.S. agriculture commodity prices.

Mark Welch, Texas A&M Extension grain marketing specialist, College Station, says the global domestic product (GDP) had not contracted since the Great Depression of the 1930s until 2009. Now, developing nations are fueling the GDP, especially China and India.

"They are the economies driving the world economy," Welch says. "They are your customer, and they are your competitor."

Welch notes that while many countries are struggling greatly with financial woes, China's economic growth is expected to be 9% in just the next two years.  That will make China an ever bigger international player in world trade.

Welch says wheat and corn have moved together in the market in recent months, although the fundamentals for each crop are different. Wheat and rice consumption has changed very little over the last 10 years. But corn and soybean consumption continues upward.

In just 10 years, corn consumption in China is up 50%, and milk consumption has risen 183%.

Other factors

Beyond the basic U.S. and world supply and demand that is impacting agricultural commodity prices, other factors enter the picture.

Welch says speculators in the commodity trading also are impacting prices. Sometimes this can be good for producers when prices are driven higher, and other times not.

"There's a large level of index funds in grains (like wheat) and also other commodities, pouring billions of dollars into commodities," he says. "Hedge funds also are involved, and they play both sides of the market."

Joe Outlaw, Texas A&M professor and AgriLife Extension economist, College Station, has done analyses on many farm bills for Congress over the years, but he says it's hard for many in Washington to see how farmers get such a small amount from any farm act, with nutrition programs taking the overwhelming lion's share.

Lawmakers also point to relatively strong commodity prices to claim that American farmers really don't need that much government assistance.

Outlaw, who also is co-director of the Agriculture and Food Policy Center, says he tries hard to explain to leaders in Congress that farmers' stronger prices are hinged on exports now—and exports in today's volatile world—can "come and go with a sneeze."

Meanwhile, Welch says he expects a strong market outlook for some time for soybeans and corn, but sees wheat as vulnerable.

Ironically, the U.S. is the largest exporter of wheat in the world, but it only produced 8.4% of the world's wheat this year. While corn and soybeans are concentrated in just a few countries of the world, wheat is grown virtually around the globe.

The Black Sea region, including wheat grown in Kazakhstan, the Ukraine, and Russia is expected to claim a big part of global wheat trade in years ahead.

Plenty of cotton

More than 4 million of Texas' 7-plus million acres of cotton this year bit the dust for a record abandonment. With Texas the largest cotton grower—by far—in the nation, you might have expected that to push cotton prices upward.

But the foreign cotton picture kept that from happening.

Carl G. Anderson, professor emeritus and cotton market expert, Texas A&M University, says as expected, increased foreign production and a reduced consumption has decreased the foreign production-consumption deficit gap for the 2011-2012 marketing year to only 5 million bales. By sharp comparison, foreign production was 13.6 million bales short of use in 2010-2011, and a whopping 25.7 million bales' deficit in 2009-2010.

This season's foreign cotton crops are doing well, especially in China and India, Anderson says.

In the meantime, U.S. cotton prices dropped off. The December 2011 cotton futures price in early June this year peaked at about $1.40 per pound, only to drop below $1 per pound by July 15.

Then throughout August, the December 2011 cotton contract remained trading at about $1 per pound because export demand for cotton essentially dried up going into fall, Anderson notes.

"The export demand for U.S. cotton is sluggish—even at a dollar per pound," Anderson observes. "Earlier export sales at much higher price levels than now are being cancelled at a rapid pace."

Anderson says because the U.S. now is just a residual supplier of cotton to the rest of the world, the extremely poor, drought-ravaged Texas crop has little impact on world market prices.

In addition, cotton crops in the Southeast, the Delta states, and the Far West have some pretty good cotton in places—especially in California.

Texas A&M University economist John Robinson says USDA recently trimmed world consumption by 1.5 million bales. China and India—the big players—each accounted for one-third of that expected cut in cotton consumption, with Pakistan, Turkey, and Mexico collectively making up the other third of the drop.

Sorghum crop short

Sorghum continues to grow in its diversified uses, but the worst drought in Texas history put a whammy on this year's crop, which impacted the U.S. production.

USDA recently pegged U.S. sorghum production for this year at 241 million bushels. That's a 30% reduction from last year, and the smallest production since 1956, which incidentally, was the worst year of the infamous 1950s drought.

Area harvested for grain has been projected at 4.3 million acres, the lowest harvested U.S. acreage since the Great Dust Bowl era in 1936.

Texas' sorghum alone has suffered a loss of $63 million this year, and when it all is harvested this fall, production from 1.6 million acres planted is expected to be half as much as average, marking the lowest sorghum harvest in Texas history. In fact, some sorghum fields in Texas this year were baled for much-needed hay.

But the demand for sorghum is expected to remain strong with 30% to 35% of U.S. sorghum going for ethanol production now. Sorghum produces about 2.7 gallons of ethanol per bushel.

Another 46% of sorghum in this country goes for livestock feed, and this is critical to the beef industry, which is expected to be strong for some years.

So overall, sorghum and other Texas and Southwest commodities have a lot of great expectations in years to come.

Overall, commodity prices still remain relatively strong for most major crops and livestock.

The Texas countryside just needs months—not weeks—of rain to begin to replenish subsoil moisture for crops, grasses in pastures and range land, and stock water.