Long-Term Outlook for AgWritten by John Ritten
When making ranching decisions, it’s important to think about both short-term and long-term outcomes. As I’ve noted before, the USDA releases a monthly World Ag Supply and Demand Estimate (WASDE), which offers a lot of insight into how commodity markets will shape up as the year progresses. If interested, you can sign up for email delivery of this report at usda.gov/oce/commodity/wasde. This report is very useful in making tactical decisions within a year. However, when making long-term strategic plans – herd expansion decisions, for example – it is useful to look at a longer planning horizon.
The Food and Agricultural Policy Research Institute (FAPRI), part of the University of Missouri, releases a 10-year commodity outlook every March. This report, called the U.S. Baseline Briefing Book, is a useful tool when making long-term decisions. The report is free and available at fapri.missouri.edu. The FAPRI report provides estimates for production and prices over the next decade but also shows ranges of forecasts based on different macroeconomic assumptions, which provides some insight into the level of confidence you might want to put into their numbers. Obviously, a lot can change over the next decade, but keeping an eye on long-term trends should help guide investment decisions on your ranch.
Of note in the most recent report is FAPRI’s forecast of livestock numbers and profitability. The report forecasts beef cow numbers to grow from the 2015 level of 29.7 million head to a peak of 31.6 million head in 2019 and begin a slow decline to 30.4 million head in 2025. They also project profitability on a per-cow basis over the next 10 years. I’ve adapted their numbers in the table below. They show that as national herd numbers increase, profit on a per-head basis will decline. They project that, this year, profits will drop by roughly 40 percent compared to last year.
Interestingly, this reduction is entirely due to decreased prices as they predict annual costs will actually decrease. Also, note that after this year’s dip in annual costs, the forecast is for annual costs to steadily increase. Producers need to be aware that costs are rising, and the forecasted decrease in cattle prices means per-head margins are going to suffer.
Looking ahead, they expect on average, across the country, that cows will be unprofitable in both 2019 and 2020 before steadily increasing over the rest of their forecasted horizon. This information is useful when deciding whether or not to retain heifers this fall.
Retaining heifers that will be profitable as calves this fall to generate calves that may not be profitable for two or three years of their useful life as breeding stock may not be a wise investment. Waiting a few years to keep back less valuable calves as replacements that will generate more valuable offspring may be a strategy worth considering.
A bright note for the industry is that consumption of beef per capita is forecasted to increase through 2019, but this is partly an impact of decreasing beef prices over the same years. The forecast is for meat consumption to increase per capita through 2019, then stabilize for a few years before increasing again in 2023. The main reason that consumption doesn’t steadily increase over the horizon is more related to reductions in supply than any decrease in demand.
FAPRI also forecast that the percent of consumer's total food budget that is spent eating away from home will increase over the next 10 years. This could be a good sign for the industry as people generally buy more expensive cuts of meat at restaurants then they purchase to cook at home.
The FAPRI report also looks at most of the other commodities and makes forecasts about the ag industry in general. In the graph below, they show projected net farm income over a variety of economic situations. On average, they expect stagnant farm incomes for a few years before modest growth. One of their worst scenarios shows declining incomes for the coming years, failing to get back to 2015 levels over the next decade. One of their more optimistic forecasts shows steady increases in farm incomes. However, we still don’t get back to 2013 levels.
So when making long-term decisions, I would be prepared to experience pre-2009 levels of profitability rather than 2013 or 2014 levels. If your business plan is dependent on seeing the same level of profits as the last few years, you may want to revisit some of your long-term plans. Keep in mind however, that these numbers are just forecasts, and a lot of changes can – and will – occur in the next decade.
I would rely more on the WASDE report to make decisions regarding short-term decisions this year, but be aware of long-term forecasts when making investment decisions that occur over a longer horizon.