U.S. Ag Well Capitalized for Downturn

Despite worries world demand still growing, says CEO

Published on: Oct 23, 2013

Long term demand prospects for agriculture still look positive. That was the message coming from presenters at the 2013 Oilseed and Grain Summit, which concludes in Minneapolis today.

Inflation worries, interest rates, and a slower Chinese economy may be concerns, but "tomorrow, the world is still hungry," says Carl Casale, keynote speaker for the event which brings together grain industry leaders from throughout the world.

Casale, CEO at CHS, a Minnesota-based farmer cooperative with 1,100 locally-owned cooperatives serving about 300,000 farmers, expects steady income growth from world grain demand, fueled by population growth and income changes.

"Based on world and U.S. corn stocks to use we'll see some short term corrections, but U.S. Ag is incredibly well capitalized right now," he says. "It's well positioned to handle a downturn in prices for a protracted period of time.  If you own your land and have a good operation, life with $4.50 corn should be just fine."

"By 2050 food supplies must nearly double," says Carl Casale, CEO of farmer cooperative CHS.
"By 2050 food supplies must nearly double," says Carl Casale, CEO of farmer cooperative CHS.

China's slowing GDP growth is a concern, but Casale believes the country's meat consumption will continue growing. In the big picture, Asia is where the future lies.

"China's social contract is food and jobs, no matter what," he says. "Chicken nuggets always trump Gucci bags."

Inflation prospects are also in the forecast. "If you print money like this, there will be a day of reckoning," says Casale. "But that day is still a ways away. Look at the weak jobs report. Until we see this economy heat up, it's hard to argue for significant global inflation."

Casale has a similar outlook on interest rates. "The only way to go is up, but again, we're a ways away from significant movement in interest rates."

Speakers throughout the summit echoed a similar theme: short-term downturn but steady, long-term demand growth.

Livestock: bright spot

For grain farmers, livestock is the sector to watch. Three trends will impact beef and pork over the next several years. "First, we are moving into a much cheaper feed environment," says Ryan Turner, commodity risk manager at FC Stone. "Higher feed prices led to decreased livestock production here and globally, but now that is changing. We could very well be heading into a multi-year lower cost feed environment."

In 2009 it costs around $1.20 to add a pound of beef to a high plains fed steer; by 2012 that cost was as high as $1.30. But costs should be closer to 85 cents per pound gained by summer of 2014 says Turner.  Similarly, cost of production for one Iowa hog was as high as $200 this past July, but that figure should fall to $150 per head by the beginning of 2014. "This will incentivize growers to increase production," Turner believes.

Second, near record high U.S. retail prices for beef, poultry and pork should result in higher livestock production - eventually. "It takes time for beef, but we're headed in that direction," says Turner.

Third, global protein consumption is expected to increase, especially in developing nations, and chicken will be the largest benefactor because of its pure efficiency in turning grain into meat. Those increases, through 2022, will be in found most likely in China, Russia, Brazil and other developing countries.