Megatrends and game changers in the poultry business

Six market forces impacting the poultry business were examined at the Oilseed & Grain Trade Summit.

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Panel at the Oilseed & Grain Trade Summit discusses game changing economic events in 2015: Daniel Redo, Thomason Reuters Lanworth; Dr. Michael Swanson, Wells Fargo Bank; Jim Tobin, Monsanto; Mark Zenuk, NGP Global Agribusiness Partners.
Panel at the Oilseed & Grain Trade Summit discusses game changing economic
events in 2015: Daniel Redo, Thomason Reuters Lanworth; Dr. Michael Swanson, Wells Fargo Bank; Jim Tobin, Monsanto; Mark Zenuk, NGP Global Agribusiness Partners.

Agriculture – including the poultry business – doesn’t operate in an economic vacuum, said Tom Scott, CEO, Informa Economics, speaking at the Oilseed & Grain Trade Summit (OGTS).

A host of factors in the business environment are of significant implication for the poultry industry, including forces that can be described variously as megatrends, economic distortions and game-changing events.

Income growth is driving world protein demand 

A megatrend – one that is going to operate for a long time and not likely to reverse course – is the global income growth that will increase the demand for animal proteins for years to come.

“There is a rising tide of income across the globe that is driving trade in meat proteins,” said Rob Murphy, senior vice president, Informa Economics, who also spoke at the OGTS.

“Meat and poultry will be produced in countries with comparative cost advantages (U.S., Brazil, New Zealand and Canada) and shipped to developing countries with the biggest income growth,” he said.

But other trends call for a knack for timing in managerial decision-making – commodity cycles come to mind.

End of the commodities "super cycle"?

The CRB Index (futures price index that includes 19 commodities), for example, has been falling and adds to the already bearish tone on grains.

The weakening of oil prices, the big drop in grain prices – and the cooling of China’s economy – has some observers asking, "Are we reaching the end of the commodities super cycle?" But don’t jump to this conclusion too quickly.

Scott noted that the recent weakness in commodities may only be a new inflection point in the market.

“Commodity prices relative to the last 150 years are still relatively low,” he said. “Going forward there is room for commodity prices to rise and in the not-too-distant future commodity prices might increase.”

At the moment, meat and poultry are commodities for which prices are increasing.

Biofuels past inflection point, for now

Another commodity of great potential significance to the poultry industry is biofuel. Scott said at the OGTS that biofuels are past the inflection point. Yield growth in corn crops should take care of future growth in biofuel demand, he added.

While various interests may agree or disagree about the way the build-out in U.S. biofuels capacity has been handled by the government, it is probably true that the market is past the inflection point. However, that is true barring any further changes in government mandates. So, animal proteins producers give thanks for now, but beware tomorrow!

World demand and the cooling of China’s economy

Daniel Redo, manager of agricultural research and forecasts for commodities at Thomason Reuters Lanworth, pointed to the potential effects of slowing economic growth in China on global agricultural markets.

“China is the world’s second largest economy and largest importer of goods and the only country that has ever managed to extend a period of 6 percent-plus growth for more than 30 years,” he said.

China has for years had a seemingly insatiable demand for U.S. feed grains and oilseeds, he noted. But in the past few months, there have been troubling indicators, with foreign direct investment and fixed asset investments on the decline. Not only is the country sitting on a potential housing bubble but banks are carrying a lot of bad debt.

“Whatever the magnitude of the eventual effect on the ag markets, economic growth in China plays a fundamental role in the world’s ag markets,” he said.

Currency valuations’ role in world trade

Multi-year highs in the U.S. dollar are not impacting trade flows yet, but will this change?

“The dollar index is not always a good proxy for what effects global meat trade. The dollar index is heavily weighted to the euro and the pound – the currencies of countries with which the U.S. doesn’t conduct a lot of meat trade,” said R ob Murphy, senior vice president, Informa Economics.

In terms of poultry trade, the U.S. dollar is far weaker than the traditional dollar index suggests. The peso is a more realistic barometer of the dollar’s strength in the U.S. poultry industry’s important markets.

Nonetheless, the U.S. dollar is strengthening compared to the Brazilian real, an important U.S. competitor in the global meat and poultry trade. “This works to disadvantage the U.S. in the years to come if the trend continues as it is expected to do,” Murphy said.

While the U.S. dollar’s strength is not having much impact on global trade and markets at the moment, Scott advised listeners to keep an eye on how the strength of the U.S. dollar may favor soybean plantings in Brazil.

Transportation infrastructure’s role in the grains market

“The U.S. transportation network is stretched,” Scott said, “which has led to high transportation costs and weak interior basis levels.”

Scott presented the basis for wheat in Rugby, North Dakota – a relatively remote shipping point – as an example of how high transportation costs have impacted the market. High railcar costs and limited supplies have supported basis levels at terminal markets. Buyers are passing those prices and risks onto grain producers through lower country basis levels.

Grain farmers are not being encouraged to sell at the current prices, Scott said. That dynamic may continue until grain carries are built up with more grain stored.

Market competition for barges and railcars

Barge freight costs are at record high levels, Scott said, trading at 1,000 percent of tariff in fall 2014, or roughly double what would be normal. The rates have been driven by up-bound movement of commodities like fertilizer, salt and scrap steel, and down-bound movement of materials like fracking sand.

The numbers of barges and railcars are down relative to the demand in the transportation system. As a result, shippers in the grain sector are bidding against shippers in the oil and gas and steel sectors for these assets.

“It’s about accessing these assets in the transportation system and outbidding the sectors that may be willing to pay higher prices,” Scott said. “I think we are going to be struggling with these market dynamics for a while.”

Scott went on to say that the North American transportation system is in danger of losing its competitive edge compared with Brazil. While the North American transportation infrastructure may still be superior, the gap in transportation costs between North America and Brazil is narrowing.

U.S. transportation costs are high now

Mark Zenuk, managing director of NGP Global Agribusiness Partners, said North America has one of the world’s best logistics systems, but it is extremely taxed, in part, due to high demand from the oil and gas sector as new basins have come into production.

“Over 1.5 million barrels a day of oil are moving by rail today and this has really taxed the supply chain in the U.S. This has led to the secondary market trading at $5,000 a railcar, which amounts to $1.30 per bushel of grain.”

While investment in transport capacity is occurring, including in the barge lines, Zenuk does not foresee those assets catching up with demand anytime soon.

“The heart of the logistics system that I would say is best in the world is now extremely high cost. And you can almost compare the U.S. to Brazil in cost differential of transporting material today because it is an open market. The utility goes to whoever can pay the most and unfortunately it is not the agribusiness space,” he said.

The business of managing chaos

You might say it is chaos out there in the business environment, and the process of sorting through the ever-changing barrage of data to identify the factors of significance to a particular business is the secret to success.

The Oilseed & Grain Trade Summit was hosted by HighQuest Partners and Informa Economics.

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