Supply and Demand -- Supply Side

As most of us are aware from high school and college economics classes, our economy is based, to a large degree, on the concept of supply and demand. When supply is high and demand is low, product cost is normally low. When supply is low but demand is high, product costs are normally high. There is, obviously, an endless range of combinations between these two extremes. We also can't forget the affect that governmental action has on this situation as well. By and large, however, this overall principle is relatively true of the feed and grain markets.

Supply is affected by how much grain is produced in a given year (crop yields) which are affected by plantings, weather at planting, conditions through the growing seasons and harvest conditions. The number of acres planted in a given grain is affected to a large degree by the market for that grain previous to planting. In other words, the number of acres planted in a given grain tends to increase when markets are high. We need to define here what grains, or crops affect this overall picture. Grains typically include corn, grain sorghum, milo, oats, barley, wheat and rice. Other crops included in the prediction of feed prices include soybeans, cottonseed meal, canola meal, sunflower meal to name a few. For example, if corn prices in 1997 and early 1998 were high (they were) the number of acres planted in corn will increase. If these prices were low, the likelihood is that fewer acres would be planted in corn and other, more profitable crops will be planted. Assuming weather conditions at planting are good, i.e. it was dry enough to get in and prepare the ground and allow for actual planting and subsequent rainfall occurred post-planting, then these crops are off to a good start. Next, depending on the production system, whether irrigated or dry land, the weather during the growing season will greatly affect yields at harvest. In the Southern United States, yields have been depressed because of the drought conditions that existed this summer. Yields, or more accurately, sale and use potential of many crops was affected by the drought by the increased incidence of aflotoxin. Corn in Texas, cottonseed and cottonseed meal in Louisiana and Arkansas are all showing higher than acceptable afaltoxin levels which can be very problematic. Fortunately, the Midwest and upper Midwest has had a very good growing year and will support the depressed production seen in the south. Let me give you a few numbers:

Based on the Feed Outlook report generated by the Economic Research Service, USDA on October 14, 1998, we find that feed grain production is the largest since the 1994/1995 production period which itself was a record year. The 1998/99 U. S. production of feed grains is forecast at 271 million metric tons, down slightly from the previous month, but up 2 percent from 1997/98. Overall feed grain supply for 1998/99 is forecast at 312 million tons, down 1 percent from last month because of lower-than-expected carry-in stocks of corn, but up 6 percent from the year before. All things considered we are looking at a ample supply.

We also have to factor in the grain that remains in storage from the previous growing year. If we look at corn stocks on September 1, 1998, (the end of the 1997/98 marketing year) we see they were 1,308 million bushels, up 48 percent from a year ago. While this is significantly higher than last year at this time it is, in fact, below expectations. More grain was used in the later summer months than normal which is reflective of very low corn prices, large inventories of hogs and broilers, shortages of forage and pasture in the southern third of the country, and feeding cattle to heavy weights. All things considered though, we are carrying over more grain than we have in recent years which will contribute to the overall supply and hold prices down given a constant demand. Since most other grains are based on corn pricing we will tend to see this affect other grain prices as well.

It is also interesting to note that current grain and subsequent feed prices are affected at any given time of the year by the information listed above as well as the prices of futures contracts and options. As you are aware these are financial instruments designed to "technically" provide protection for the producer for unfavorable movements of the market. Unfortunately, vastly more contracts are traded in speculation. This can have a negative effect on the price of grains, driving it artificially high or low based on the information and interpretation of this information by speculators and the actual traders of these commodities in Chicago.

Supply and Demand -- Demand Side

Demand is affected by a whole host of situations. First, we must remember that grains are not just used for livestock feeds although this does make up a large portion of the usage. Grains supplies are purchased for use in livestock feeds as mentioned but also for food (human and pet consumption), seed and industrial use. I believe we will find these areas to be increased users of grain supplies as our population grows and becomes more affluent, as we develop new uses for grains in various production systems (i.e. ethanol production, etc.) and we become more efficient in these systems. We are seeing increase use of grains in the manufacture of complete feeds in the swine, beef cattle and laying hen sectors of the market. Overall use by the four major classes of food producing animals - swine, beef cattle, dairy cows and poultry posted a potential feed use of 166.3 million tons in 1997, up three percent from 1998. This feed usage potential was broken out into 25 percent by swine, 20 percent for beef, 21.7 percent for dairy, 18.7 percent for broilers, 7.7 percent for laying hens and 5.9 percent for turkeys.

Another use of grains is the export market. We typically ship millions of tons of grain to countries like China and Mexico in a given year. While this will be affected this year by the overall depressed global economy, export will, nonetheless continue to be a significant destination for much of our grain. World trade in grains is expected to stagnate in 1998/99 because of slow growth or declining consumption in major importers. However, U. S. exports are expected to increase because of reduced competition. Argentina and Eastern Europe are expected to reduce corn exports because of reduced production, while low prices limit the incentives for China to export. U. S. corn exports are forecast at 42 million tons, up one million from last month and up three million from the year earlier. However, this would still be the fifth lowest in the last 20 years.

Over recent years China has become an enormous importer and exporter of grains, particularly corn and at any point in time may be a customer for U. S. grain as well as a competitor for world export markets. A major trade agreement with China could result in many tons of grain shipped in that direction. Unfortunately the status of U. S. trade with China is volatile and unpredictable at best. At this time, however, for a number of reasons it appears that U. S. exports to China will be relatively low. Production levels were very high in China this year, and overall grain demand has softened somewhat.

A Global Grain Production System

Our world has evolved significantly over recent years and a producer in Northern Mississippi can no longer simply evaluate his local grain situations when determining expected grain prices as has been suggested. Based on this we see that a bumper crop of corn, wheat, etc. in Brazil, who also exports heavily, can reduce the demand for U. S. grain in the export markets. As we have seen as export demand softens, grain pricing in the U. S. drops as well. Our competitors in the world market include Argentina, Brazil, Australia, China as well as others. Depending on production levels in these countries as well as our trade agreements with them we may, at any given point in time, be competitors of or suppliers to these countries. World agricultural production economics has become extremely complex and far beyond my capability to thoroughly understand or explain.

All right, so what's the bottom line?

Based on reports we are seeing on production and world usage levels, feed grain prices are projected to be the lowest since 1987/1988. The season average price of corn received by farmers is forecast at $1.80-$2.20 per bushel. The mid-point of this range would be the lowest since $1.94 in 1987/88. The lowest corn price so far in the 1990's was $2.07 in 1992/93, a year that featured a record crop, record domestic use, sluggish exports, and very large stocks -- somewhat similar to the 1998/99 outlook.

Likewise, soybean production has also been very good this year with fairly large carry-over stocks resulting in lower prices for soybeans and soybean meal. This, in turn, depresses the price of other protein sources who must lower their prices to compete.

All things considered, for the next few months we should experience some lower than normal grain and feed prices. This will be an obvious shot in the arm for the livestock industry and especially the beef cattle industry by helping reduce production costs. This should be true of both cow/calf, stocker and feedlot operations who can all take advantage of lower feed and supplement costs. As we proceed into the spring of the year it may be helpful to reevaluate the markets and consider contracting some feeds and/or grains into the later part of the year.