Some economic rules of the last century no longer apply. Dan Basse, president of AgResource Company, says the times are changing and cattle producers should take note.
“When we get high grain prices, we typically get herd liquidation,” he said. “I don't think that will occur this time.” Basse spoke at a recent feedlot meeting cosponsored by Certified Angus Beef LLC, Feedlot magazine, Pfizer Animal Health and Purina Mills.
Global poultry production is at a record high, the hog numbers are increasing and the world cattle herd is starting to expand.
“High grain price does not translate to lower livestock prices. Higher grain prices, at this point, do not translate to lower cattle prices,” Basse said. “That's because we're in agricultural demand-led markets.”
Demand is the number one cause for higher grain prices, he said.
“Normally in our business we see rallies because of a loss of supply, such as from adverse weather,” Basse explained. “The environment we see today is far different, because this rally is led by demand.” Since 1988, there hasn't been a major drought in the key U.S. corn-producing regions, but domestic use of corn has increased.
“In 2008, in this country we will be consuming around 13.2 billion bushels of corn,” he said. “That means, to keep stocks steady, we need to plant about 90 million acres and get a yield of 156 bushels per acre — a big chore.”
Basse said grain diverted from feed to ethanol production is a very small part of the equation. “The reason we have grain prices as high as they are is not so much because of biofuels; it's really globalization taking hold,” he said. “That's why I believe corn prices won't fall below $3.50 per bushel any day soon.”
Countries like China and India have a rapidly growing middle class. Across the world, 44 countries have expanded their economies at a Gross Domestic Product (GDP) rate of 4 percent or more.
“That has never before happened in the history of the world,” Basse said.
More people, with more money to spend, translates to a strain on supplies of all ag products. “If you're in China and you get more disposable income, the first thing a Chinese family will do is spend it on diet,” he said. “When you make more money, you consume a better quality of food.”
That's true in the United States and abroad, said Larry Corah, vice president for CAB. “Consumers will pay more for good beef,” he said. “As the middle class continues to grow in our country and abroad, the demand for high-quality beef will support increased premiums paid to producers of that product.”
High shipping prices and lack of agricultural land in highly populated countries could be a positive factor for U.S. cattlemen, Basse said.
“Today it costs $3.70 for me to ship a bushel of corn from the Gulf (of Mexico) to Japan, China or India,” he said. “It costs me as much to ship it there as it does to buy the corn itself. If I live in those countries, I'd rather import the meat than pay for the grain.”
Basse predicts global freight rates will trend higher for the next three to five years. “Meat trade is going to show real vigor because of these rates as we go down the road,” he said.
Basse's key message to cattle feeders was that prices aren't going anywhere.
“The good news is, if I have normal weather in the year ahead, I won't see any significant increases in price or stock because of supply,” he said. “We are forecasting that $4 corn, $10 beans and $8 wheat will expand global grain production, thus keeping high prices somewhat under wraps.”
From 2000 to the present, world grain stocks have been in decline, mainly due to demand. “Everybody needs to differentiate today from what occurred before 2000. Whatever it is that you learned up until then, forget it,” Basse said. “This is a new world. It's a brand new environment for the grain farmer.”
It's also a noticeably different environment for the cattle producer, but Basse said that's not all bad. High prices are here to stay for inputs, but so are relatively high prices for the beef consumers demand.
Online copies of the event presentation can be found at http://www.cabpartners.com/events/past_events/index.php.