Kim Anderson professor emeritus of agricultural economics at Oklahoma State University left and Stan Bevers professor and Extension economist for Texas AampM AgriLife Extension discussed market outlooks for wheat and wheatcattle enterprises at the Red River Crops Conference at Altus Okla

Kim Anderson, professor emeritus of agricultural economics at Oklahoma State University, left, and Stan Bevers, professor and Extension economist for Texas A&M AgriLife Extension, discussed market outlooks for wheat, and wheat/cattle enterprises at the Red River Crops Conference at Altus, Okla.

Red River Crops Conference: Low prices, high costs challenges for 2016

Crop and livestock producers face market challenges in 2016

Farmers and ranchers at the recent Red River Crops Conference at Altus, Okla., had to filter out a lot of negatives to find a few bright spots. But they were able to pick out a few nuggets of less than dire projections from ag economists.

“No commodity prices look all that good,” said Texas A&M AgriLife Extension Economist and Cotton Marketing Specialist John Robinson. Weather preceding and during the 2016 growing season will be a factor, he says.

His Texas AgriLife colleague Stan Bevers was the first of four economists to offer less than rosy outlooks. Bevers, who works primarily with cattle and forage operations, including stocker cattle, owned or leased on winter grazing, analyzed three different systems, based on a 2,000 acre farm with continuous wheat, wheat and stockers, and then transitioning to a forage-based livestock operation.

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Estimates included relatively low wheat prices of less than $4.50 per bushel; projected yield was about 30 bushels per acre average for the county selected for the model. “At less than $4.50, this model does not cover variable costs,” Bevers says. Even if wheat pushes up to $5 per bushel over the next five years, it still doesn’t work.

He figures variable costs at about $186 per acre. A $5.31 per bushel wheat market would be break-even to cover variable costs. To cover fixed costs, $227 per acre, producers would need $6.49 per bushel. That model, Bevers says, results in a $100,000 loss per year, and at the end of five years, the operator is $400,000 in the hole.

MUST CHANGE SYSTEM

“Something has to change,” he says. “We can’t spend the money for that price. We have to cut expenses — and that means we have to change the system.”

He looks at adding stockers to the mix, assigning 1,000 acres of the 2,000 acre farm to grazing stockers, and maintaining wheat on the other 1,000 acres. “Cattle prices are projected to fall from about $2 a pound to less than $1.50,” he notes, projecting that by 2020, 600 pound to 650 pound calves will be selling for around $800 a head, down from $1,200 or more.

Add volatile wheat yields into the equation — 20 bushels to 22 bushels per acre on average the last five years — and the 30 bushel estimate, in reality, could be 10 bushels less.

Bevers’ model would lease the 1,000 acres set aside for grazing, assuming 53 cents per pound of gain. Wheat yield on that acreage would drop to about 25 bushels per acre. “Revenue loss for this system is about the same as it is for continuous wheat,” he says. The wheat/stocker model requires some additional costs — fencing, water, etc. After five years, the operator is still looking at a $400,000 loss.

CUTTING REVENUE AND EXPENSES

Transitioning to a forage-based livestock operation could reduce operating costs, but it also cuts revenue, he says. The goal would be to make up revenue with significant cost savings. The first year, the producer covers 70 percent of anticipated stocking rate with bred heifers and gets to 100 percent the second year, eliminating the wheat operation. He figures the cattle cost $1,750 per head, which he purchases with a five-year note, less 20 percent equity.

“The result is reduced revenue, but also reduced expenses,” Bevers says. This model still doesn’t cover variable expenses. The end result: a $300,000 loss.

The sticking point in the transition to livestock, he says, is the cost of money. In addition to the cattle, operators also must provide water, fencing, and seed to establish permanent forage.  “Some growers may qualify for Natural Resource Conservation Service funds. In some cases, producers will already have cattle.” Some also may have fences in place and adequate water resources.

“The big question is: how much of the system does an operator already own? To make this work, he needs to own some aspect of it.”

BEEF OUTLOOK LESS ROSY

The beef market does have some positives, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist, but the outlook isn’t as rosy as it has been for the past few years.

“We got off to a bit of a rough start in 2016,” he says. “Things are not pretty for a lot of markets —commodities, oil, stocks. Cattle have been on a huge roller coaster in 2015. We’re in a transition phase, but the biggest part of that is done now.”

The U.S. cattle herd is rebuilding after bottoming out in 2014, Peel says. “Herd growth started in 2014 and we probably added about 1 million head. Growth is probably not over yet; we still have about 1 million fewer heifers than we did in the 1990s.”

Feeder supply was up about 1 percent in July, he says. “So we’re not yet beginning to add to supply to an appreciable degree.” Heifer retention is up significantly. Cow culling, typically at about 10 percent, was just under 7 percent in 2015, and cattle on feed level in 2015 was at or above  the year before. Feeder cattle inventory is just beginning to grow.

The industry pushed carcass weights to record high levels, Peel says. “briefly last fall, they were up to 930 pounds, which caused a mini-wreck and some feedlot problems.”

PRICE PRESSURE COMING

Cattle inventory will increase over the next two to three years, he says. “The beef inventory is beginning to grow, and over time we will see pressure on price.” The positive nugget: “We have already made the major part of the adjustment; beef supplies are up and imports are down.”

Beef has maintained demand over the past few years, Peel says, in spite of higher prices, but price will come down.” The strong dollar continues to hamper exports, but exports are holding steady compared to a reduction last year.

The declining level of beef imports will offset some of the U.S. industry’s increased production. “Beef has been on a big roller coaster ride up,” he says. “But we always expect a backside to that. We did most of the adjustment in 2015, and will see a more measured level of price decline going forward.”

Success in wheat production is possible, says Kim Anderson, OSU Extension economist and wheat market specialist. “Someone will be successful at farming — it might as well be you.”

But that’s not without significant challenges, he says. Currently, no positive opportunities similar to the ethanol boom back in 2004 are available to boost wheat prices past break-even. Foreign producers also sell at lower prices, as much as 74 cents per bushel less. Supply remains an issue.  “From 2008 through 2015, six out of eight years we saw record wheat crops across the world. That’s a lot of wheat, so the price should be low.”

$9 WHEAT BY AUGUST?

Anderson got the audience’s attention by asserting that wheat could go the $9 a bushel by August. “It could happen,” he says. “In 2010, wheat was at $2.98 and in seven or eight months it was at $9.”

But U.S. production won’t be the catalyst that pushes wheat within as much as $3 of that price, he says. He believes wheat will top $6 soon, “either this year or next year — it will give you a profit if you earn it.”

U.S. farmers must produce quality wheat, he emphasizes. “Our cash price is 70 cents below futures because of a negative basis,” he notes, and low protein could make it worse. “Poor quality could mean a cash price $1.50 negative basis.”

U.S. wheat prices could drop to $4 in 2016, Anderson says, “But it will not stay long. After harvest, but not as early as June and July, start looking at foreign crops. That’s when you can see some big moves. In 2015, sales at harvest were about $5 per bushel.” Most pre-harvest strategies, except storage or put or hedge options, work about the same, he says. Comparisons show storage and put and hedge are less promising.

“How low can wheat prices go? Probably $4.40 on the board and a $3 cash price,” he says. “When will it go up?  When we lose a foreign crop.”

Producers wondering how to make a profit at current low prices need to concentrate on production, not marketing, Anderson says. “Keep production costs below average. Keep production above average. Outwork the competition. Make your equipment go further. Keep quality and production high.”

Prices are volatile, he says. “When you get $8 wheat, expect to see $4 wheat. It will come. And if you’re going to grow wheat, do it right.”

LITTLE CHANGE FOR COTTON

As for the challenging cotton market that continues to languish in the 60 cents to 67 cents trading range, John Robinson says he expects nothing much to change in 2016.

“We’re just coming out of the effects of a $2 cotton market,” he says. At that price, mills cut back and switched to polyester. Also, China bought a lot of expensive cotton ($1.35 and up), and put it in storage. Much of it is still there. Keeping that cotton out of the market kept the price artificially high. “Cotton should have been 40 cents a pound in 2012,” Robinson says.

“We are now beginning to whittle away at the surplus. We had a 17 million bale drop in world production in 2015 versus 2014. But it will take two years, into 2017 or 2018, to begin to balance supply and demand.”

For the time being, he says, cotton producers are “stuck with what we have now.” Cotton has spiked up to 67 cents on export demand, he notes. “When it gets to the low end of the 60 cents to 67 cents range, we see a spike in exports. Mills like U.S. cotton — when they can afford it. When it gets to 65 cents, demand goes away. They can buy other cotton cheaper, and they can buy polyester.”

Over the past few years consumers “have become used to fabric with less cotton in it,” Robinson says.

“So, when does the price of cotton go up? When something changes; when something goes wrong with foreign production; when polyester gets more expensive; when consumer preference turns back to cotton; when consumers get more money in their pockets. This is not a short-term thing.”

MORE OF THE SAME

The U.S. economy, though not in a recession, is not robust, he says. “I don’t see much change on the demand side to increase cotton consumption — we’re just looking at more of the same.”

As with other commodities, the strong dollar hampers exports, Robinson says. Speculators have minimal impact on cotton prices, maybe 1 cent of a 3 cent price swing. The frequent assertion that the cotton stored in China is of poor quality can’t be proven, he says. “How does anyone know how good the quality is of the cotton in China?”

As long as that cotton is available, a significant rise in price is unlikely, he says. “Dollar cotton won’t happen as long as China maintains that inventory. China would put a cap on any rally by dumping that cotton on the market.”

He does see a possible bullish scenario. The 2016 U.S. cotton crop likely will get off to a good start, thanks to adequate moisture stored from El Niño rainfall this winter. ”Then, it will get hot and dry.The question is whether it will get normal hot and dry, or supercharged La Niña hot and dry. Also, when it turns hot and dry makes a difference.”

Hot, dry weather during cotton’s peak fruiting period could be a significant challenge to yield, Robinson says. “Watch for a weather market rally. In July and August, watch and be quick. Cotton could go to 70 cents a pound, but nor for long.” Growers also will benefit from producing high quality cotton. “The world has an oversupply of poor quality cotton. Mills will pay for good quality.”

For cotton, grain, and livestock, the economists say, producers will have to be alert to market movements, scrutinize production costs, maintain yields, and strive for quality. The coming season will present significant challenges, they agree, and producers will have to be alert to opportunities and make certain they have product to sell. 

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