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Welcome to 2021 where already a host of risk-generating events are beginning to be played out across the globe that are disproportionately aimed at reducing profits for most meat producers regardless of country. The first consequence will be rising production costs, a function of both developing natural disasters (spreading drought) and new government policies. There is a kind of negative synergy among some of these things that will multiply the effects of cost increases by a factor larger than would be the case from any single one. We can begin by talking about US and global feed grains prices.
According to a very recent USDA report, a combination of crop destruction by the Iowa derecho of 2020 and unexpected increased use of 2020 corn stocks moved prices up in US corn markets. The reduction due to the weather event (derecho) likely reduced US corn production by about one to two percent. An unexpected surge in feed-use during the year (most likely contributed to by finishing hogs kept in a holding pattern far longer than normal, awaiting slaughter plant openings) reduced old crop stocks by almost four percent. These events produced a total supply draw down (new and old crop) of about two and a half percent when weighted together. The result was a reduction in “days of use” remaining from 42 to 39. This is an estimate of what is on hand to backstop normal projected use of the 2020 harvested crop by all sources. There is a strong relationship between price and remaining “days of use” as you might suspect. Currently, the total days of use remaining is consistent with about $4.50/bushel ($177/MTon). Current cash bids in Iowa are right now just above $5.00/bushel($196.5/Mton) and many analysts are seeing $6.00 corn as likely by early summer or before if spring weather is not nearly perfect for planting.
Increased corn exports, especially to China is also draining US supply as China begins to climb out of the ASF disaster which began in late summer of 2018. We can expect very large purchases to continue if their repopulation strategies are largely successful. Refer to an earlier article to see how you can really know what is going on with that restart by looking at internal Chinese prices for pork. Right now the price pattern is very uneven in terms of reflecting success or large setbacks in repopulation. Add to that the disruptions in logistics associated with “war time” protocols in regions where the COVID-19 disease springs up (most recently around Beijing) and expect a bit of a muddled picture. The biggest pork consuming seasonal pattern is upon China with the new year so increased demand with shorted supplies are probably keeping prices very high right now. If they remain high into summer, the success of the repopulation will come into question.
With Trump out of office, the globalists are in the ascendancy worldwide and this will result in a persistent rise in commodity prices beginning with energy and then quickly move into feed grain costs (and everything else). One of the strategies of the current US government is to make fossil fuel energy expensive to use and thereby choke it off while subsidizing a path to alternative energy forms. One of the first acts of the Biden administration was to cancel a major pipeline project for oil, already fully approved with respect to its environmental impact, from the western Canadian shale regions, down through the US to export ports and refineries in the southern US. This will force the Canadians to cut back on oil production and send it out through more expensive and riskier transport methods (train cars and trucks) along alternative routes to the west through the mountains.
In addition, the Biden administration stopped all new leasing on government lands to produce shale oil (by fracking), which provides both oil and inexpensive natural gas. Currently fracking technology produces half of US crude oil and two thirds or more of US natural gas. Stopping all fracking on federal lands is estimated by some to reduce supply by about 25%. Expect oil prices to slowly climb back into the $100-$150/barrel range if these executive orders are not stopped or dramatically slowed down by litigation. In addition, there is a promise that not a single new coal fired plant will be built to generate electricity (government will make it too expensive).
Like it or not, fossil fuels drive everything related to energy and currently account for about 90% of energy use in the US. Short of racing to mandate some of the promising new nuclear energy production methods, expect feed costs and most other costs, including the cost of exporting pork by land and sea to jump substantially short- and long-term reducing revenue while raising costs. As mentioned, these policies will be a kind of force multiplier to natural disasters, like the emerging droughts which are moving slowly across the globe and reducing feed grain production significantly already.
Get ready for a reinstatement of a slew of regulations which will slow modernization of production technology, increase risks associated with production (consider WOTUS, Waters of the US regulations) where federal regulations reaching deep into local farming communities will likely be modified away from the Trump administration clarifications and re-create a murky set of rules that produce a cottage industry of lawyers and consultants raising both the cost and the risks of new investment in agriculture. All of this while US pork production remains perilously close to packer capacity. The futures market is very optimistic in spite of these things and weaned and feeder pigs are selling for top dollar. I am scratching my head but ready to be given a lesson if wrong. Welcome to 2021 just when you were so glad 2020 was over.
