“We don’t know ‘nothing’ about the future. Make sure you make marketing decisions with that in mind.”
In an hour long highly technical, yet entertaining presentation that kept a room filled audience listening on the edge of their seats, Darrell Holaday of Advanced Market Concepts/Country Futures summarized the economic outlook during the recent 580 WIBW Farm Profit Conference at Valley Falls.
In a “macroeconomic summary,” Holaday said, “Fiscal responsibly is not a political reality in the United States and other countries at this time. The Federal Reserve has chosen to monetize the economy rather than let it hit rock bottom, which is a decision that will be debated for years.”
Contemplating if the nation’s downside balance sheet will be reduced “someday,” Holaday identified: “The inflation risk and currency weakness is a risk the Fed has been willing to take.”
However, the problem, according to the speaker, is “they will find it very difficult to ‘wean’ the economy off accommodation. The minute there is a sign of weaning; there is a lot of ‘squealing.’”
Recognizing that growth in the U.S. economy has been less than expected, Holaday contended, “Structural changes in the labor force, the entitlement programs, make the unemployment issues very difficult.”
The Renewable Fuel Standard Program (RFS) created under the Energy Policy Act (EPAct) of 2005 established the first renewable fuel volume mandate in the United States. “It was a most successful move that really stimulated rural America,” admitted Holiday, recognizing the increased demand and higher prices for corn.
As required under EPAct, the original RFS program (RFS1) required 7.5 billion gallons of renewable-fuel to be blended into gasoline by 2012. “The decline in total gasoline use has slammed the industry up against the blend wall,” Holaday said.
“If EPAat moves grain based ethanol down to 13 billion from 14.4 in 2014, it would lower corn use 500 million bushels,” according to Holaday adding, “There is political leaning to an adjustment down to 13.5 billion instead of 13.”
The move to subsidize ethanol production and use impacted world production of grain and oilseed. “Thus most capital including money and technology were moved into grain production throughout the world. Those countries took advantage of the U.S. drought and still have a lot of production capability,” Holaday warned.
Because the United States gave up a market share of world trade in corn and wheat, “It will now have to compete at lower price levels to regain share,” Holaday forecasted.
Drought and high corn prices reduced base for cattle feeding in this country. “Our last leg of the stool is China. It is a strong leg for this country’s agriculture, but still a little scary,” Holaday analyzed.
“Long-term demand for food globally is very strong, but emerging economies are slowing significantly,” evaluated Holaday, reminding: “Don’t forget the new Farm Bill reduces the cap on the Conservation Reserve Program (CRP) to 24 million acres.”
Looking at the corn market, Holaday said, “I am not sold there will be a reduction in the U.S. corn acreage with normal planting conditions,” advising producers to watch the soy/corn ratio for new contacts. “That will set insurance rates and move acreage,” he indicated.
The EPAact ruling mentioned earlier “is important to price,” Holaday reiterated, “There is still a lot of corn, and demand has an uphill battle.”
Affecting the price, will be cattle feeding, ethanol, exports and the PED virus, said to have sharply curtailed the fall pig crop, and continuing to reduce litters at this time.
“We are a 14 billion bushel U.S. corn crop away from problems,” Holaday acknowledged.
While wheat isn’t as major a crop in Kansas as it once was, Holaday asserted, “There is too much wheat in the world, and a big corn crop in this country will push wheat another $1.50 lower. The Black Sea Region is key to watch in wheat production.”
World demand for soybeans is very strong, led by the Chinese. However, large soybean crops are predicted for South America and Brazil. “If South America has a large crop, the Chinese will likely cancel U.S. purchases,” Holaday predicted.
If there is an Argentine currency crisis, which is a probability, Holaday cautioned: “That could put a lot of soybeans on the market.”
“It is possible to have 95 million corn acres and 82 million soybean acres in the U.S.,” Holaday calculated.
“However, China always makes me nervous given the large share of U.S. consumption of soybeans,” he divulged.
As the cattle herd size has been reduced in the United States, Holaday conceded, “Expansion is beginning, but it will always be slower than the market anticipates.”
This will be due to the high value of cull cows for producers to sell, high price of feeders to buy and a lack of grass.
“Do you understand the U.S. has become a ground beef society?” Holaday questioned. The high price of ground beef in January was driven by retailers being in short supply of the product demanded by consumers.
Predicting red meat supplies to be down three to five percent this year, Holaday said, “The risk to summer and fall feeder cattle values is a drought, but otherwise, downside price potential is limited.”
Verifying there is always concern about the U.S. economy; Holaday said U.S. meat exports are likely to struggle late in the year, compared to 2013.
Noting that the PED swine virus will be a factor in pork and beef prices, Holaday figured, “Tightest fed cattle supplies will actually be in the fourth quarter of the year. Tight beef supplies will be reduced if this country avoids a drought.”
Wrapping up his remarks, Holaday pointed out, “These are not your Dad’s markets. They factor in changing fundamentals very quickly, and move when they need to very rapidly.
“Stay on the proper side of the market. Don’t let ‘little things’ get in the way of ‘big’ decisions. Pay attention,” Holaday emphasized.