So Trump won. Now what?So Trump won. Now what?
Ag producer sentiment is soaring in the post-election period following Trump’s presidential win. But don’t get too comfortable. Plenty of challenges lie in store. Here’s a rundown of some of the major factors that will shape 2017 and beyond.
January 11, 2017
As editorial types are wont to do every time the calendar flips from one year to the next, BEEF editors have put together our list of what we see coming at beef producers and the beef industry in 2017. While we can’t claim that our crystal ball is any less cloudy or that we’ve steeped our tea leaves sufficiently, here is a rundown of the factors we think you’ll confront as the year progresses.
Overall, even though ag producer sentiment is soaring after the election, we caution against getting too comfortable about what might lie ahead. More than anything, we can likely expect ongoing business uncertainty and just as much political uncertainty and social unrest, at least at the outset.
New administration—on one hand, judging by major Wall Street financial indices, lots of money sitting on the sidelines for the last 8-12 years is coming out to play. Between that, along with tax cuts if Trump gets them through, the strengthening dollar and a host of other factors, both inflation and the cost of borrowing will rise—unfamiliar territory for the better part of two decades.
Many in ag have praised various Trump cabinet appointments. While we don’t have an ag secretary as of this writing, the appointment of Scott Pruitt as EPA administrator has raised hopes that the Waters of the U.S. rule (WOTUS) will be repealed, among many other regulatory burdens placed on food producers the past eight years.
Likewise, country-of-origin labeling (COOL) has resurfaced, with supporters of the rule hoping that Trump’s America First mantra will bring the issue back to life. COOL already died a slow, painful death, but will it be revisited again with this new administration?
The media is reporting that repealing Obamacare will be first on Trump’s list. The repeal could bring some much-needed relief to small businesses and their families, but it won’t come without pain, both politically and socially. Question is will it be repealed altogether or will a more acceptable alternative be forthcoming?
Overall, if Trump is successful in advancing his agenda in all areas of the U.S. economy, social upheaval and unrest will continue in the next four years.
Deepening domestic cultural division—If we learned anything from the recent presidential election, it was the reaffirmation of how differently the two primary ideological factions in this country view the world. There’s no reason to expect that to lessen, which increases the pressure on the industry to fight activist rhetoric.
Global economy—more and more, it appears that the European economy and the EU are holding on by a thread. China appears on the cusp of dealing with its own financial crisis, spawned by leverage and the stronger U.S. dollar the past few years, now heightened by the higher cost of repayment.
Oil prices—if OPEC, Russia and the non-OPEC countries hold to their agreement to decrease production, oil prices here will likely continue to rise—not to the nosebleed levels of the recent past, but higher than the past couple of years. That’s a big if, but in the meantime, speculation on the possibility is already lifting prices.
Interest rates—The Federal Open Market Committee increased interest rates by 25 basis points, from 0.5% to 0.75%, on Dec 14, 2016, and market watchers expect several similar moves in 2017. But there’s no reason to panic, economists say. The 25 point increase is not going to significantly impact the agricultural industry in general, and the projected 75 point increase for 2017 won’t either.
Value-added markets—Niche markets will continue to thrive as consumers demand grass-fed, organic, natural and ethically-raised meats. However, families will be sticking tight to their budgets in 2017 while they wait to see how Trump’s policies will impact their wallets.
We’ll also continue to see more activist pressures and a deeper divide between consumers and producers. A push against anything modern or any advancement in technology will continue to grow as grandpa’s “vintage” farm will come into vogue.
Beef demand—overall, across decades, beef continues to lose market share to competing proteins. Shorter term, the demand picture is confusing—the decline through the fall, then the unexpected surge in wholesale beef values in December.
The latter is related to year-end packer inventory management, but also suggests stronger-than-expected demand as retail prices finally decline enough to make a difference. Likewise, U.S. beef exports picked up steam through the fourth quarter as U.S. beef imports declined. That trend should continue in 2017.
Increased management away from antibiotic use—this is not new, given the efforts of the large, progressive feedlots, veterinarians and pharmaceutical companies the past few years, but the effort will likely accelerate.
The first major shot fired in this trend is the Veterinary Feed Directive (VFD) rule, which took effect Jan. 1. Under the rule, producers have more steps to take in order to give antibiotics in feed. This is just the start, as consumer concerns about antibiotic resistance will continue to escalate and the industry will be driven to cut use even further.
Beef Industry Trends
Value-based management and marketing—It would seem that now is the time for value-added programs to flourish, given consumer preferences and supply-deflated calf prices. If the various value-based programs have an opportunity to grow, expect more value differences in calf and feeder cattle prices.
Herd expansion—at best, there’s little reason to expect the U.S. herd to grow much this year, no matter the degree of growth ultimately depicted in USDA’s Jan. 1 inventory. That puts more pressure on industry infrastructure like packing capacity; fall calf prices were a demonstration of the pressure that can be exerted by the current lower packing capacity relative to increasing supplies.
Increased consolidation and concentration—not necessarily within the industry directly, but from suppliers to the industry, which in turn could foster more mergers and acquisitions among users.
Strengthening price discovery for fed cattle—Between the advent of Superior’s Fed Cattle Exchange and the simple fact that there are cyclically larger fed cattle supplies, there seems little doubt that a higher percentage of fed cattle will trade in the spot cash market this year than in the last five years or so. That should strengthen price discovery and subsequently reduce some of the volatility in Live Cattle futures.
Uncertain price risk management—despite what should be reduced volatility, courtesy of stronger price discovery in the cash market, absolutely nothing has been resolved in Live Cattle futures; everything so far—reduced trading hours, altered contract specs—have been catching up and aimed at symptoms rather than actual problems, like mechanical trading.
Thus, uncertainty in Live Cattle futures remains, and that brings a great deal of confusion for best options for price risk management. There’s a growing uneasiness and mistrust about the “Big 4” packers, and various factions within the beef industry will continue to distrust “big.”
As for Feeder Cattle futures, the future is very uncertain. It might not happen this year, but it would be unsurprising to see the CME abandon Feeder Cattle futures, period.
Genetic-Repro pioneering—For all of the challenges, at least a handful of seedstock and commercial producers continue to demonstrate how quickly cattle populations can be changed and how much genetic relationships can be bent. For those folks, things like single-step genetic evaluation, emerging DNA diagnostics and advanced reproductive technology mean that they’re just now scratching the surface of what’s possible.
Feed prices—lots of global carryover for key grains suggests a “normal” year should continue to pressure feed prices. From a production standpoint, the emergence of La Nina could derail that notion. On the other hand, the strengthening U.S. dollar and growing isolationistic stance by the U.S. could decrease exports and increase domestic inventory. In the meantime, it’s looking like more corn and wheat acres will trade for soybean acres this spring.
What did we leave out? Please let us know your thoughts about what you think 2017 holds in store.
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