By the numbers: price shocks nothing new
2006 ended with the second-highest corn price in the last 40 years, but this isn't the first time there has been a price shock in the poultry industry.
Price shocks to the poultry industries are not new. They have occurred many times in the past. The year 2006 ended with the second-highest corn price in the last 40 years. During October 2006, corn prices moved higher rapidly when USDA cut the corn crop production dramatically. USDA reported lower output again in the November report and may do so in its final crop report in January. But this year’s corn crop would still be our third largest ever. Last time something like this happened was in the crop year 1995-96. Quarterly corn prices averaged near $3.50 a bushel in January-March before zooming toward $5 in the July-September period. But prices fell to below $3.00 in October-December, when the new crop year began.
What was the broiler industry’s response to these very high feed costs? During crop year 1995-96, ready-to-cook production increased 5.8 percent from the preceding year. In 1996-97, it was up 3.1 percent and 5.7 percent in 1997-98. High feed costs did not slow down the industry’s production trend. If we just consider the two quarters with the highest corn prices, April-September of 1996, RTC output was up 5.3 percent from the prior year. The following year it grew by 4.6 percent but really slowed down in April-September 1998 to only a 0.8 percent increase. Hopefully, the more mature industry will make a quicker response this time to much higher feed costs.
The turkey industry also was a sizable user of feed in April-September 1996 as its RTC production was up 8 percent from 1995. The next year, it grew by 0.8 percent before falling hard in April-September 1998 by 6.4 percent from 1997 levels. Both of these meat-producing industries now have time to adjust output to meet circumstances similar to those of 1996. Will they do it? Or will they take a chance that meat prices will compensate for the higher feed prices.
We believe current corn prices in relation to soybean prices already have farmers making plans to plant record acres to corn. Ethanol plants have their needs booked well into the crop year. And that is the demand factor that is pushing projected ending stocks below one billion bushels on September 1, 2007. Fairly tight world stocks may push our exports up considerably, if our prices stay below $4.50 a bushel.
The year 2007 may show slower economic growth than 2006, as real domestic disposable income could be up only 0.7 percent versus 3 percent in 2006. We will need to feed 302 million U.S. residents even if unemployment numbers ease higher. What other surprises will these delicious nutritious food industries face in the new year 2007? It could be a very challenging year.
Our January-June projection for corn prices is $3.75 versus $2.16 per bushel in the same period last year. Our estimate for soybean meal prices January-June is $220 per ton versus $178 per ton in the same period last year.