Feed Bussiness Worldwide: September 2015
The party's over: Feed's price supercycle ends
by Eric J. BROOKS
It is a good time to be a livestock farmer and a bad time to be farming feed crops. After seven very fat, profitable years – and keynoted by a succession of European and Chinese financial panics– feed inputs are returning to their traditional price relationship with livestock farming customers.
Easy money
This can be seen in a recently released University of Minnesota study, which showed that from 2007 to 2012, the average US grain or oilseed farmer enjoyed a median annual income of US$172,000 - which when adjusted for inflation, was a whopping 153% higher than the US$67,000 average from 2002 to 2006.
After 2013, with price nearly back at their old levels but production costs significantly higher, feed crop farming returns fell below their 2002 to 2006 average.
In reality, we are merely returning to the feed crop market conditions that predominated prior to 2005. According to David Kohl, professor of agricultural finance at Virginia Tech University, an agricultural "supercycle" boom started in the early 2000s, when China's soybean imports took off and peaked during a succession of droughts from 2010 to 2012. These dry spells afflicted South America for two consecutive years and later the United States.
Throughout this time, 15 successive US and European bank bailouts created a pool of excess liquidity that quickly found its way to agricultural commodity markets.
Years of loose monetary policy coincided with tight feed supplies and a once-in-a-lifetime market rally was born.
According to Dr. Kohl, the supercycle was caused "by a convergence of events."
"We had the growth of these emerging nations, then we had the biofuels/ethanol mandate, and of course we had the Federal Reserve who lowered interest rates [after the late 2000s financial crisis]. We then had a cheap US dollar value to encourage exports; then of course our old friend, Mother Nature [drought], kicked in."
In particular, ethanol production went from consuming less than 20 million tonnes of America's 2002 corn harvest to nearly 130 million tonnes in 2012.
This biofuel boom greatly limited corn supplies at a time when America supplied over half of world exports.
Driven by ethanol production, strong import growth and plentiful liquidity, five of the seven years from 2007 through to 2013 enjoyed historically high corn and soy prices. Countless feed crop price records were repeatedly broken during that time.
The full article is published on the September 2015 issue of FEED Business Worldwide. To read the full report, please email to inquiry@efeedlink.com to request for a complimentary copy of the magazine, indicating your name, mailing address and title of the report.