The key to higher prices? Strengthening demand

As the supply of agricultural commodities continues to grow, a robust and rising demand is a producer’s best friend. The release of the most recent WASDE report of the USDA confirmed the output of crops and livestock will rise – that much is sure. And demand is showing strength.

There’ll be a surge in meat proteins available

USDA projections for 2016 call for production increases of the three main meats: Pork increased 1.7%; poultry increased 2.2%, and beef increased a whopping 6.1%. Producers are already facing the consequences of this increasing supply. U.S. cattle and hog prices in 2016 are down 8.0% since the first quarter of 2016.

And production isn’t about to slow down. USDA forecasts call for 2017 U.S. pork, beef and poultry production to increase 3.5%, 3.1% and 2.0%, respectively. Meat packers and processors will have to move a lot of proteins through the supply chain, either domestically or through export.

Domestic demand and export markets appear healthy

Recent demand history suggests they’ll be able to do that. Beef demand has remained strong in North America, especially considering rapidly increasing retail prices in 2014 and 2015. The higher prices haven’t triggered much of a decline in overall beef consumption.

This is important when we think of the current situation. Retail prices should fall with the larger meat supply, and strength in export markets could lower the need to sell more meat to North American consumers. U.S. 2016 exports of pork and beef are projected to increase 3.4% and 9.7%, respectively, over 2015 levels.

Already time to think about the 2017 crop

The fact of North America’s growing livestock production is good news for crop producers. The livestock sector’s demand for corn is projected to grow by just over 500 million bushels in the 2016-17 marketing season. That’s great, but the factors to watch are:

  • the size of the forthcoming South American crop
  • potential shifts in 2017 acreage among crops – especially the corn/soybean planting decisions.

Demand is the key to prevent a lasting period of low prices

The WASDE report offers a mixed outlook. Growing production will pressure prices – and that means profit margins will be tight. Strength in demand will be critical to sustain profitability at the farm level. The report provides evidence that demand growth will be strong enough to absorb that growing supply. That’s good news. Nothing else can prevent a prolonged period of tight profit margins.