CoBank: U.S. ag profits could hinge on South American harvest

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc.



DENVER, Oct. 22, 2012- According to CoBank's Quarterly Rural Economic Review, “the near-term outlook for agricultural markets depends critically on next year's South American crops.”

“If they fall short of the markets towering expectations, as they did last season, prices in the grain and oilseed markets could soar to new record highs,” according to the report titled, “Sputtering Global Economy and Drought-Impaired Agricultural Markets.”

Drought-stunted supplies of feed grains and soybeans bolstered U.S. prices and are imposing cost pressures on the animal protein and dairy sectors, the report explained. CoBank noted this trend could be significantly intensified by the success or failure of South American harvests to meet high world expectations.

“The near-term outlook for agricultural markets depends critically on next year's South American crops. If they fall far short of the markets' towering expectations, the grains and oilseeds markets would end up tighter than a drum, with prices soaring to new record-highs,” stated CoBank.

The report also noted particular struggles ahead for grain handlers, which will not receive the revenue support from crop insurance indemnities and elevated prices that growers will. 

The industry will fill its bins to about 65 percent of capacity this year, following increased grain storage construction in recent years, it explained. 

“In addition, drying revenues will decline, and a market price inversion will prevent elevators from earning a ‘carry' as they hold inventory over several months,” according to the report, which also noted that grain handlers will have higher concentrations of aflatoxin in their corn deliveries this year.

However, the animal protein, dairy, and ethanol industries will “bear the brunt” of the 2012 drought in the months ahead, noted CoBank.

“Ethanol margins have been severely squeezed by the high corn feedstock prices,” according to CoBank. “Moreover, with feed costs having risen more than 50 percent over the past two years, the livestock industries will be adjusting their operations for months - or even years - to come in an effort to restore profitability.”

CoBank emphasized that the broiler industry is better positioned to weather the shock of high feed prices for the next year after trimming inventory and production during the past year.

The full report also discussed declining natural gas drilling, which will end the “current glut” of the energy resource. For the full report, click here. 

The following are the key findings of the report:

-Global economic growth will remain subdued during the next year as the advanced economies struggle with sovereign debt and growth issues while China and other emerging markets attempt to spur internal growth to compensate for reduced export flows.

-The U.S. economy will remain on a 1.5-2.0 percent growth path for the foreseeable future as consumers struggle with vexing uncertainties in the job market and the future of the U.S. economy.

-The 2012 drought will sharply reduce the U.S. corn and soybean crops, but estimated crop yields are highly variable across the country and within regions.

-Many grain coops will experience a decline in revenue in 2012/13 due to the market price inversion and light volumes. Key revenue sources of drying, storing, and carrying grain could be impacted as much as 10-30 percent.

-Coops are also holding sizable inventories of fertilizer for fall applications. But crop producers will purchase and apply fertilizer this fall only if ground conditions have improved enough from the summer months to warrant doing so.

-Within the animal protein and dairy complexes, supply rationing is an interactive process between output adjustments and consumers' ability and willingness to pay higher prices.

-The near-term outlook for agricultural markets depends critically on next year's South American crops. If they fall far short of the markets' towering expectations, the grains and oilseeds markets would end up tighter than a drum, with prices soaring to new record-highs.

-The current glut of natural gas will end soon. Gas companies have already sharply curtailed natural gas drilling in response to present soft market conditions.

-Those rural communications companies that have embraced the broadband world and adjusted their business strategies accordingly are thriving. Those that have not, are languishing.

#30

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