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LIVESTOCK MARKETS: Commodity bubble to start inflating

Poultry industry experiencing "sweet spot" between low grain prices and growing economy.

Dr. Paul Aho of Poultry Perspectives — during his presentation at the Poultry Market Intelligence Forum held during the 2017 International Production & Processing Expo in Atlanta, Ga. — gave an overview of “Domestic & Global Drivers for 2017.”

Aho discussed the poultry industry's position in the commodity cycle and interest rate cycle, as well as trends in median household income and projections for growth.

“Prices of a lot of different commodities burst in 2012 and started falling. I think they have reached their low point now, and the cycle keeps cycling, (so) now we're going to start inflating that commodity bubble once again,” Aho explained.

The recent improvement in oil prices will also help improve commodity prices, he added. This gives oil exporting countries more money to purchase more chicken.

In terms of interest rates, Aho said a 2-3% increase in interest rates can be expected soon.

He said corn prices have either reached the bottom or are very close, suggesting that the price will likely rise over the next couple of years.

“This is really a sweet spot for the poultry industry. These are prices that are as good as it ever gets," Aho said.

Corn production is pretty stable, he added, so “there is not a lot of incentive to increase corn production. Without huge incentive to increase production, the production will stagnate. In fact, the predictions are that millions of acres will shift from corn to soybeans this year.”

Aho did suggest that soybeans may have not reached their lowest prices yet but added that, like corn, prices may be close to the low point.

He also noted that soybean meal has not yet reached its highest point, and production is rapidly increasing in Argentina, Paraguay, Uruguay and the U.S.

Aho mentioned China's appetite for soybeans and said he expects it to continue to increase. “For years, I always predicted that this thing is going to level off soon, but now I've thrown in the towel, and it's just going to increase forever. That's the easiest prediction to make about China importing soybeans," he said.

Despite that very strong and growing demand, however, Aho said he thinks soybeans will overwhelm the market this year.

If this is as good as it gets right now, he added, then grain prices inevitably are going to start rising again.

Aho expects pork production to increase by 5% and beef production to increase by 3%. He further observed that poultry production volume in the U.S. can continue to grow by approximately 4% this year, notwithstanding any unforeseen events.

According to the U.S. Department of Agriculture, the U.S. will have an additional 2 billion lb. of red meat and poultry on the domestic market, but Aho said he doesn't "see that as a problem. There are some observers that are wringing their hands over this problem. I don't see it being a problem if our economic growth continues the way it's going right now."

Aho predicts that red meat consumption will surpass poultry consumption over the next few years because people typically buy more red meat as their income conditions improves.

He also provided a forecast for the world economy. He speculated about trade relations with Mexico and the U.S. dollar rising against the Mexican peso. Aho pointed out that Mexico is the top buyer of U.S. chicken leg quarters, purchasing 25% of all leg quarters produced.

“You want to treat customers like that very carefully,” he noted.

The next largest buyer of U.S. chicken leg quarters is Cuba.

“I don't think we can assume that relations with Mexico and Cuba are going to be great this year, but hopefully calmer heads will prevail, and we will continue to have good relations with those two countries,” Aho said.

“As you all know, exports are a roller coaster. It goes up and down. The roller coaster will continue, but we have a very good product to sell, and people like eating chicken so in the long run, we are fine,” he concluded.

Market recap

The February fed cattle futures market was mostly lower this week. Nearby contracts closed lower Monday and Wednesday at $116.175/cwt. and $115.575/cwt., respectively, but posted gains into Thursday’s close of $116.875/cwt.

March feeder cattle futures followed the same trend. Nearby contracts closed lower Monday at $123.90/cwt. and Wednesday at $122.075/cwt. but recovered some of the losses into Thursday’s close of $123.75/cwt.

For the beef cutouts this week, Choice and Select were higher at $193.75/cwt. and $190.85/cwt., respectively.

February lean hog futures were higher this week. Nearby contracts closed higher Monday and Thursday at $67.10/cwt. and $70.35/cwt.

Pork cutout values were lower Thursday. The wholesale pork cutout decreased to $82.91/cwt. Loins, hams and bellies all closed lower at $73.54/cwt., $59.80/cwt. and $171.09/cwt., respectively. 

Hogs delivered to the western Corn Belt were higher this week, closing at $65.75/cwt. on Thursday.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price at 85.93 cents/lb. on Jan. 27.

According to USDA, egg prices were unchanged, with a steady to weak undertone. Offerings have been moderate to heavy at times. Supplies have been moderate in most areas but moderate to heavy in California and the Midwest. Demand has been light to moderate.

Large eggs delivered to the Northeast were higher at 81-85 cents/doz. Prices in the Southeast and Midwest were also higher at 84-87 cents/doz. and 76-79 cents/doz., respectively. Large eggs delivered to California rose to $1.58/doz.

For turkeys, USDA said the market was mostly steady, with light to moderate offerings. Demand has been light to good. Prices were higher on the lower end of the range at 96 cents to $1.05/lb. for both hens and toms.

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