USDA updates supply and demand estimates

Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation

The January World Supply and Demand Estimates (WASDE) report from USDA includes what are essentially final production numbers for the current crop year.  Last Friday’s report provided very little new information for the supply side of the corn market.  Harvested acreage was revised down just enough to mostly offset an upward revision in yield.  The final tally for 2012/13 corn: 97.2 million acres planted, 87.4 million acres harvested, 123.4 bushel national average yield resulting in total production of 10.78 billion bushels.  Historically, that’s a sizable figure, but in the context of current corn demand, it is uncomfortably small – as the market has been making clear for several months now.

The real interest in last week’s report was on the demand side.  Pre-report expectations were rather mixed, but on average, the trade expectation was for a small (20 million bushel) increase in carryover from last month’s estimate of 647 million bushels.  What the market got was a 45 million bushel reduction in carryover; so an already-tight carryover figure looks tighter still after last week’s report.  The primary source of that tighter carryover was a 300 million bushel increase in feed use compared with last month’s estimate.  Incidentally, to accommodate that higher feed use estimate, export projections were dropped to just 950 million bushels – about 8.8% of production.  If realized, this will be the lowest corn export figure since 1971/72 (when exports were 782 million bushels) and the lowest percent of production exported since way back in 1960/61. 

The substantial upward revision in feed use suggests that meat industry contraction has not been as great as was expected in mid-to-late-summer as the magnitude of the drought was still being assessed.  These feed numbers correspond to stabilizing, and even increasing, production figures in at least part of the meat sector.  In fact, last month’s quarterly Hogs and Pigs report showed an essentially stable hog inventory.  Likewise, recent broiler hatchery reports have shown increasing egg sets.  Last week’s hatchery report showed that egg sets have been equal to or higher than year ago levels for each of the past six weeks.  Meat production figures in Friday’s WASDE report are broadly consistent with these trends, calling for pork and broiler production to be about flat from 2012 to 2013 (a slight increase in pork production, a slight decrease in broiler production).

By contrast with pork and broiler production, beef production is projected to decline sharply from 2012 to 2013.  Drought-induced contraction in 2011 and 2012 along with the long biological lags inherent in beef production virtually preclude any other outcome.  In fact, declining beef production is probably in the cards in 2014 as well.  This means a couple of things.  First, beef consumption will decline relative to pork and broiler production.  This is a rather obvious mathematical truism: less beef produced means less available to consume.  Second, and more interestingly, higher pork and broiler production will limit the upside price potential in the meat sector.  With all the talk of tight margins in the meat complex, the move toward steady-to-higher production entails a good bit of risk.  This seems especially true for the pork sector, where producers on average still seem to be facing substantial red ink.  The tighter vertical structure of the hog and broiler sectors may be encouraging integrated firms to make a play for greater market share by trying to get ahead of the curve with respect to expansion.  Good for them if it works out.  Either way, it’s probably bad news for beef because it will mean a more competitive meat counter at a time when historically small supplies and lingering production challenges related to the drought are already making it hard to be price competitive.

The Markets

Fed cattle prices slipped back a bit this week.  The 5-Area weighted average price worked out to $126.04, down just over $2 from the prior week.  Fed cattle prices have oscillated within two or three dollars of the mid-$120s mark going back to about mid-October of last year, remarkable stability in that market when you think about it.  Fed cattle slipped last week despite a pretty good showing in the wholesale beef market.  Last week’s comprehensive boxed beef cutout worked out to $191.32, a little over $1 higher than the prior week.  Calf prices were strong last week – the first full week of the year.  In last week’s national feeder and stocker cattle summary report, feeder prices were called firm to $5 higher, and calf prices were called $3 to $10 higher.

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