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In my near 40 years in the business, no truer words have been spoken that what I've read in Ag Perspectives. WPI Client and Risk Manager
This article originally appeared in the 20 November 2019 issue of Ag Perspectives
By Matt Herrington
Feeder cattle prices have room for additional price gains, based on cattle feeding margins. WPI’s research suggests that feedlots placing cattle on feed in November/December 2019 can expect returns on investment (ROI) of 8-15 percent, based on factors including animal sex, placement and finish weights, and marketing arrangements. Returns to feeding cattle are near their highest point since 2015 with a combination of low feed costs, strong live cattle futures, and comparatively low feeder calf costs buoying returns.
WPI’s work specifically examines the expected returns to placing feeder cattle on feed in the coming month and does not examine the profitability of recent closeouts. The objective of this effort is to provide a forward-looking measure of feedlot financial conditions and how rational economic actions based on that outlook may influence commodity markets.
Based on the assumptions made in this model, Kansas cattle feeding operations can expect to make $10/cwt (roughly an 8 percent ROI) on placing light weight calves on feed and marketing them at a heavier weight in four months. Due to the higher veterinary cost and death loss associated with lighter weight placements, however, better returns are offered by placing heavier feeder cattle (750-850 lbs.) on feed and marketing at heavier slaughter weights in the spring. Returns under that scenario range from 13-15 percent, based on steer/heifer placements and other factors.
Notably, cash prices for larger feeder cattle have been higher than normal this fall due to the possibility of capturing these returns. The large spread between April and June live cattle futures is providing an incentive (reflected in WPI’s models) for feedlots to procure heavier cattle and finish them with hedges against April futures.
As reflected above, WPI’s projections are created for five distinct “cases” – i.e., example scenarios for cattle feeding operations. The starting point for each case is a unique set of biological assumptions about how certain types of feeder cattle will perform in feedlots. Assumptions such as feed conversion rates, average daily gain (ADG), and feed ration composition are based on findings from academic and industry literature.
Projections for the economic variables in the model (i.e., costs and revenues) are created using current futures market prices for live cattle, feeder cattle, and corn. Futures prices are adjusted to reflect an expected cash price by incorporating the expected basis in Kansas to each commodity in the relevant time period. For example, the expected purchase cost of a 600-lb. feeder steer (Case 2) is created by adding the expected November basis for Kansas feeder cattle to the current quote for feeder cattle futures. The five-year average basis for Kansas feeder steers of different weight classes is shown below.
The following set of charts shows how the expected returns to placing cattle on feed has changed in recent years. Notably, there is a strong seasonal tendency for expected margins to turn negative in the late spring for feeder steers but not for heifers. Another seasonal trend is that the typical spread between futures contracts often offers strongly positive margins for both steers and heifers in the late fall and winter. One caveat is that the graphs exhibit “roll volatility” (sudden jumps as the model moves from one futures contract to the next) due to the algorithm used to select futures contract months for cattle purchases/sales. These jumps obviously deviate from reality in that cattle feeding operations can view all listed feeder cattle/live cattle futures and make appropriate hedging decisions, where as WPI’s algorithms “force” the model to examine certain contracts. Despite the roll volatility present in these models, however, they still present a useful tool for examining the financial returns offered to cattle feeders.
The final step in this analysis is to examine the breakeven feeder cattle price under each scenario. The breakeven price is the maximum price cattle feeders could pay, under the model’s assumptions, and still maintain a positive margin. Presently, the breakeven feeder calf price for animals under 600 lbs is $176-181/cwt whereas the breakeven price for heavier animals is near $167-169/cwt. With current feeder cattle futures ranging from $144-146/cwt, and average November/December feeder cattle basis levels ranging from -$8-18/cwt (depending on weight), this suggests feedlots have the financial abiltiy to pay higher feeder cattle prices. Whether or not feedlots will pay more for cattle remains to be seen, however, as cattle feeders will obviously work to maintain the maximum ROI possible. The relationship between feedlot margins/ROI and feeder cattle procurement patterns is the subject of ongoing WPI research.
This article originally appeared in the 2 December 2019 issue of Ag Perspectives.
By WPI Staff
Despite the fact Argentina’s new government hasn’t made an official declaration, there are rumors flying about the new export taxes that are supposedly to be implemented. The strongest versions of the rumors suggest there will be a 35 percent tax on soybeans (versus 26 percent presently), a 20 percent tax on corn (up from 8 percent currently, and a 15 percent tax on wheat exports (versus 8 right now). With this plan, there will be an estimated $2 billion annually. However, other rumors suggest there will be a 20 percent tax on wheat and a 15 percent tax for corn.
Under the latest budget law (2019), the government is limited to increasing export taxes by 30 percent on soybeans and 12 percent for all other products. For any taxes above those values, the new administration will need congressional approval. The incoming administration does not have majority support in congress, however, (holding 109 seats when 129 are needed to hold a quorum). Despite support from other parties, they will have to negotiate hard for any congressional approval. On the other hand, president-elect Fernandez’s team is saying they will need to revise the 2020 budget, which might give the administration a chance to alter the clause requiring congressional approval for tax increases.
This year, tax revenue will be far from the $2 billion they aim to collect. Export sales already declared and approved cannot be charged with export taxes. From an exportable surplus of 12 MMT of wheat, exporters have already declared sales for 10 MMT (including 1.2 MMT this week) and almost 15.6 MMT for corn (including 2.8 MMT this week). Mr. Fernandez and his team will use arguments such as a better exchange rate and reduced income taxes (from 30 percent to 25 percent, imposed by the current administration) to smooth the effects of the export tax increases.
Apparently, they are also examining strategies to accelerate foreign exchange transactions for times when fresh U.S. dollars are needed. One example of such a strategy would be giving the administration legal authority to temporarily increase export taxes. As background, agricultural products represent 60 percent of Argentina’s total exports and about 10 percent of the nation’s direct taxes.
Yet another issue creating discord in Argentina is the VAT reimbursement plan. With the current administration, the government retains 5-7 percent of the VAT and reimburses it within 45 days. Payments are very delayed, and farmers are worried that it will be impossible to recover their reimbursements once the new administration takes office. All this is, of course, excluding the losses they are facing due to the devaluation of the Argentine peso.
One question worth discussing is whether Argentina will see demonstrations and strikes like those which occurred in 2008. There is no clear answer to this question, but initial economic analysis shows these export taxes will create negative margins for many crops/farming regions, thus encouraging farmers to switch to a single-crop rotation (i.e., soybeans) and investing less in inputs. This will affect not only yields and grain quality but also will contribute to the deterioration of soil health.
Preliminary results of analysis looking at the impacts of increased export taxes in Cordoba (performed by the Cordoba Grain Exchange) show strongly negative margins for most crops, except soybeans.
The official Argentine foreign exchange rate(s) remain almost unchanged due to the currency exchange restrictions while the spread between the official rate and the black-market rate is slowly increasing (63 ARS/USD versus 69). With such aggressive restrictions, the spread will certainly keep increasing. Remember that the spread reached almost 70 percent during the administration of President Cristina Fernandez.
The Parana River is suffering the longest and most damaging dry season in history. This week, the draft was 9.9 meters (versus 10.5 on average) and it seems the draft will keep moving lower for several more days.
The wheat crop is already here, and many vessels have started to arrive. The Panamaxes will load less volume upriver but can compensate by loading more in the South. Most of the crop will go to destinations that use handysized vessels.
The river has also impacted the corn market, as the volume panamax vessels are now unable to load upriver will have to be filled in the South. Corn is scarce in the south and very expensive, but buyers have no choice. It’s always cheaper to buy expensive corn than pay dead freight.
This is the time when big discussions start. Buyers need to cancel upriver volume in order to be within contractual quantities and are trying to avoid steep price increases in the South for the volume they now need. Corn in the south is getting complicated as buyers are trying to buy at market price, comparing it with the sell-side for full completions, but exporters will only offer those parcels at replacement prices (which will certainly be more expensive than full completion offers).
New crop wheat is starting to flood ports, so the best move for exporters is to maximize the contracts to rotate and free up port space to keep originating during harvest. However, that will also be limited by the river’s draft capabilities.
The wheat harvest is moving quickly now, advancing 10 percent last week to hit 31 percent total completion. The core area (that was less affected by the drought) is showing above average (and expected) yields. The flow of trucks to ports is averaging about 2,000 per day (about 58,000 MT) and last week ports received 7,900 trucks (230,000 MT). Even though this is a strong pace of truck arrivals, the vessel lineup is for about 600,000 MT and a large portion of the vessels should be nominated soon for all the December shipment program done already.
This is the reason why harvest is moving fast and FAS prices are higher than at the beginning of last week ($170/MT versus $166 for prompt discharge). There is no harvest pressure, at least for now. The FOB market is $3-4/MT higher than last week, but demand is quiet. December programs are almost fully done for both sides, though there might be some more December business done if wheat starts flooding ports and sellers need to reinforce their sales. For buyers, that could represent a good opportunity, but, otherwise, end users will remain focused on positions for January onwards.
There was a solid round of business done in the local market for both old and new crop corn last week. The old crop lineup is still large (1.2 MMT) and exporters still need to buy some volume. For the new crop, farmers are selling early, trying to avoid the possible impacts of higher export taxes.
The FOB market is quiet with premiums remaining high (55H for December and January) due to expensive replacement. On the buy-side, it seems there is no hurry to pay these prices, as end users are covered for December and buyers are wiling to wait before filling any January needs. It seems that upside risk is small and other origins may be cheaper.
Thanks to some rainfall last week, soil moisture levels have recovered, and framers should start planting the late crop soon. So far, 42.5 percent of the area is planted with just 0.5 percent weekly progress. The slow planting is due to lack of moisture and the fact that the planting window for the late crop will start soon.
Soybean markets remained active last week with good Chinese demand. Crush margins in China are positive, around $30/MT, keeping interest from the Asian country. There was some activity last week despite the U.S. Thanksgiving holiday that slowed the markets.
Chinese buyers have been nervously buying spot position as there are no additional “duty free” import licenses for U.S. soybeans. Chinese soybean stocks are adequate right now, but with Brazilian soybeans only, the Chinese will not manage to reach the new Brazilian crop, or at least its inventories will be very tight by the time the crop arrives. Consequently, December positions traded last week at 210F, then again at 215F and finally at 220F CNF China. Now, the market is devoid of sellers while demand is still open.
Brazil shipped 4 MMT in November, with 3.7 MMT destined for China. This is lower than the 5.4 MMT shipped last year. So far, Brazil has shipped 69 MMT this year, versus 80 MMT during the same period in 2018.
On the other hand, new crop basis has increased sharply over the past few weeks. In fact, commitments from non-Chinese buyers have also been significant, especially for February, March, and April shipments. It is estimate that 1-1.5 MMT has already been sold for each month. That would tighten the supply/demand situation significantly, to the point that China would not be able to cover its 7MMT-monthly import need for February, if 1.5 MMT are sold to other destinations. Brazil needs to harvest as soon as possible to cover these needs. Last year, Brazil exported 2.4 MMT in January, a feat which won’t happen this year due to the delayed planting. In February 2018, Brazil shipped 6.4 MMT (another record high), and this year should bring similar exports, if 1.5 MMT are sent to non-China destinations and 5 MMT go to China. The latter statistic is pretty small versus China’s soybean needs.
In March, Brazil will still need to maximize exports in order to meet the expected demand. Argentina will only start to participate in the market from April onwards.
So far, the Brazilian crop is estimated at 123 MMT for the 2019/20 year – which is higher than the 118 MMT during the prior year. The crop/production estimates are in good shape, but Brazil needs a big crop to avoid a huge mess for the international markets.
Farmers sold huge volumes of soybeans in the local market last week with exporters registering 0.5 MMT of exports for the coming campaign. Exporters are doing this as a hedge against farmer selling. Farmers are nervous about a potential increase in export duties, and so are selling new crop soybeans. The soybeans are sold in U.S. dollars and, once delivered, will be paid in pesos at the exchange rate as of the time of delivery. There is legislation to protect exporters from a potential increase in export duties and that law would allow exporters to register sales at the duty level of the moment of sale and grants that no future increase would affect the registered soybeans. In the end, this is a protection to the whole soybean value chain, for farmers, exporters, and everyone in between.
For example, 8 MMT of wheat sales are already registered, out of an exportable surplus of 10 MT. That means any increase on wheat export duties will have a very small impact on government tax revenues, since most of the crop is already protected. Nobody knows what the new government will do with export duties, but commercial firms are assuming the export taxes might increase from 24 percent to at least 30.
Last week, on FOB cargo was traded at 70F for December shipment while FOB replacement for old crop was around 50F. December positions are now offered at 75F and new crop is at -10N for May shipment.
Argentina loaded 1.328 MMT in November, significantly more than the 944,000 MT loaded in November 2018. The vessel lineup for December so far is 268,000 MT which, if realized, would put total soybean loadings for 2019 at 10.3 MMT.
Argentina has already planted 39 percent of new crop soybeans and more rains are needed in the south of Cordoba and west of Buenos Aires and Pampa provinces to keep planting advancing. The subsoil moisture levels are very dry, with little reserve moisture to help ensure proper crop development. If the weather remains dry, there will soon be big concerns about Argentina’s crop.
The FOB market is very quiet, and Uruguay has only planted 20 percent of the expected area. Uruguay’s plantings are much more delayed than Argentina, presently.
Paraguay’s markets remain very quiet as exporters are waiting on clarity from the incoming Argentine government about the policy of transitory imports. Definition on that policy is needed so Paraguayan exporters know the levels that will be used to import Paraguayan soybeans for crushing in Argentina.
Paraguay’s harvest is going to start in January. Last week’s rains were timely and significant for the entire soybean-growing area. So far, the crop is in good condition overall.
Beef and pork exports added 85 cents per bushel to the price of soybeans and 39 cents per bushel to the price of corn in 2018, according to the latest report by World Perspectives Inc. (WPI). Over the past three years, WPI has analyzed the impact of U.S. red meat exports on the value of domestic feedgrains and oilseeds.
Among new information included in the latest report are statistics that point to the value of red meat exports to U.S. soybean producers. According to WPI, the market value of pork exports to the soybean industry in 2018 was $783 million. WPI’s updated study shows that without red meat exports, U.S. soybean farmers would have lost $3.9 billion last year and U.S. corn growers would have lost $5.7 billion.
The updated report includes a projection of domestic feed use impacts based on both the long-term 10-year baseline projections for meat exports and a special analysis of the critical importance of the proposed U.S.-Japan trade agreement. USMEF has also prepared state-specific statistics on the value of red meat exports to the top 15 soybean states and top 10 corn states.
“The World Perspectives study has been a very useful tool in quantifying the importance of red meat exports to our corn and soybean member organizations,” said USMEF President and CEO Dan Halstrom. “Results of the study and the subsequent updates demonstrate that maintaining global market access for U.S. beef and pork is critical to continued growth and to the continued value that meat exports bring to corn and soybeans.”
The updated study also looks forward, projecting that U.S. pork exports are expected to generate $8.68 billion in market value to soybeans from 2019 to 2028. Red meat exports are expected to generate $19.1 billion in market value to corn and $3.1 billion in market value to distiller’s dried grains with solubles (DDGS) in that same period.
“When the original study came out a few years ago, it gave us a good look at the value of U.S. beef, pork and lamb exports to corn and soybean farmers,” said Dean Meyer, a corn, soybean and livestock producer from Rock Rapids, Iowa. Meyer, a member of the USMEF Executive Committee, noted that the WPI study continues to support the fact that exporting red meat drives demand for livestock, in turn driving demand for livestock feed.
“The updated study offers a fresh look at corn and goes a little deeper into soybean meal and what red meat exports mean for soybean growers. As grain farmers, we are aware that meat exports add value by increasing the volume of soybean meal and corn used to feed cattle and hogs, but the numbers in this study provide a clear picture of just how important those exports really are,” said Meyer.
USMEF and the National Corn Growers Association initially commissioned WPI to quantify the impact of U.S. beef and pork exports on corn use and value in 2016, using 2015 data. Record-setting growth in red meat exports since 2016 – along with an uncertain global trade climate that has developed since the original study – led USMEF to request updates. Using final 2018 data and new 2019 to 2028 USDA baseline projections, WPI updated its analysis of red meat exports’ impact on corn in 2018 and expanded the analysis of the value of pork exports to soybeans.
Highlights from the updated WPI study include:
- Since 2015, meat exports represent the fastest growing category of corn and soybean meal use.
- In 2018, exports accounted for:
- 14.6 percent of total U.S. beef production;
- 25.7 percent of U.S. total pork production;
- 459.7 million bushels of corn utilization – with a market value of $1.62 billion at the year-average market price;
- 2 million tons of soybean meal disappearance — the equivalent of 84.2 million bushels of soybeans with a market value of $783 million.
- In 2018 beef and pork exports added an estimated $0.39 to the average 2018 corn price of $3.53/bushel, and pork exports added $0.85 per bushel to the average 2018 soybean price of $9.30/bushel.
- Since 2015, one in every four bushels of added feed demand for corn was due to beef and pork exports, and one in every 10 tons of added feed demand for soybean meal use was due to pork exports.
- Over the next 10 years, meat exports are forecast to generate a projected $30.8 billion in cumulative annual market value to corn and soybeans based on USDA’s long-term forecast for crop prices.
In response to the 2016-2020 Beef Industry Long Range Plan’s key strategic objective, “Secure the broad adoption of individual animal ID traceability system(s) across the beef community to equip the industry to effectively manage a disease outbreak while enhancing both domestic and global trust in U.S. beef and ensuring greater access to export markets,” WPI researched and wrote the industry’s most foundational analytical document on animal identification and traceability. The report offers a series of conclusions based on, among other methodologies, a 600-plus respondent quantitative survey, 90-plus interviews with industry participants from all sectors), and a deep-dive review of 9 global systems supported by direct interviews with foreign industry association and government officials.
Since the report’s initial rollout at the 2018 NCBA Convention in Phoenix, AZ, WPI has presented findings to and led constructive discussion with over 30 audiences of stakeholders from across the industry and beyond.
On behalf of the U.S. Meat Export Federation (USMEF), in 2018 WPI delivered the results of an updated study aimed at quantifying the value red meat exports deliver to U.S. corn producers. The original 2016 study, as well as the 2018 follow-up, also quantified the impact that red meat exports have on select corn co-products such as distiller’s dried grains with solubles (DDGS). The updated 2018 study concluded that 2018 beef and pork exports will use a combined total of 14.9 million tons of corn and DDGS, which equates to an additional 459.7 million bushels of corn produced – an increase of 29 percent over the 2015 projections.