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With market uncertainty ahead, risk protection recommended by livestock economist

Candace Krebs
Special to Ag Journal
Surging prices for soybeans drove a late fall rally in the grains complex that is also pushing feed prices higher. CSU economist Stephen Koontz says the jump is largely due to South American production being down and Chinese imports being up. He sees potential for grain prices to keep trending higher in the months to come.

With dry conditions likely to continue, cattle producers should prepare for downward pressure on the market and carefully consider the benefits of livestock risk protection, a newly revamped federally subsidized insurance product, according to a livestock economist who spoke during the recent four-state crop insurance workshop hosted by Colorado State University Extension.

“We expect to see drought persist and expand. It looks to be quite a tough winter,” said Trent Milacek, Oklahoma State University’s livestock economist for the western area.

“If it stays abnormally dry, it’s probably going to reduce demand for cattle,” he added. “The increased price of cattle feeding and less grazing is only going to weigh on cattle prices.”

While retail beef demand has remained strong during the pandemic, a new wave of restrictions on indoor dining is likely to put renewed pressure on the beef complex. With hay and grain supplies shrinking, feed costs are also headed higher.

Add to that the transition to a new presidential administration and the rollout of a coronavirus vaccine.

“There’s a lot of uncertainty in this market,” Milacek said. “Anything we can’t predict increases risk, and that hurts prices.”

Fortunately, a federal insurance product called livestock risk protection, or LRP, has been revamped over the past year to make it more affordable, flexible and farmer-friendly, Milacek said.

LRP is available from federal crop insurance agents and can be used to insure feeder cattle, fed cattle and swine against future price risk.

It is similar to a market hedge, Milacek said, but roughly $15 per head cheaper, based on his recent price calculations.

The program has also been modified to allow producers to insure a larger number of cattle and hogs and now includes unborn calves as well as existing livestock.

“All of this is huge for producers and makes it something they really need to look at,” Milacek said. “The government cost-share rates really cheapen up some of this protection. Another thing to consider is you don’t have to pay the premium until the end of the policy coverage, so that’s another huge advantage that could be very helpful in terms of cash flow.”

For crop farmers, dry weather in the U.S. and other parts of the world has led to tighter global supplies, with potential for more future price rallies ahead, according to Stephen Koontz, CSU professor and extension economist based in Fort Collins.

Soybean futures have already jumped around a buck and a half since October.

“We’re back to soybeans being the market driver,” Koontz said. “And I think the soybean market still has a ways to go.”

The big boon is Chinese imports, which are now running above the five-year average and nearly on par with where they were two years ago, he said. While the U.S. is still mired in the throes of the COVID-19 pandemic, China has largely recovered and is also rebuilding its hog herd following an outbreak of African swine fever, Koontz explained.

That’s given a shot-in-the-arm to corn and milo as well as beans. USDA economists have predicted China will more than triple its corn imports over the coming year.

“Wheat is the crop I'm most pessimistic about,” Koontz added, calling it “the dog’s tail that refuses to wag.”

While he does see potential for winter wheat acreage to rebound slightly, he also pointed to surplus supplies, particularly in China, where wheat is being stockpiled.

“China’s awash in wheat, but everybody has a lot of it,” he said.

China’s outsized influence on commodity markets comes with a downside. The Chinese have ramped up U.S. imports primarily due to weather-related production challenges in Brazil, Koontz said.

“China is quite happy to go to South America and buy as much as they can possibly manage, so there are some long-term issues there,” he said.

Amy Hagerman, an OSU ag and food policy specialist, touched on trade as well. She noted that gross domestic product took a big drop in key markets around the world and vaccine availability will be important for reopening restaurants and fueling an economic recovery.

Having worked at USDA during previous presidential transitions, Hagerman assured farmers overall policy will stay relatively consistent even as priorities shift under the new Biden administration.

Biden’s main priorities are likely to include rural development and expansion of rural broadband, more incentives for beginning farmers, climate change mitigation through conservation incentives, and more emphasis on regional and local food systems to improve supply chain resilience, she said.

Hagerman also predicted a continued expansion of rainfall-triggered insurance policies, which could be helpful to states like Colorado and other parts of the plains that suffer frequent droughts.

Colorado state climatologist Russ Schumacher offered a weather update and highlighted a long-term trend toward more extreme weather.

“If we look at precipitation, the areas that are usually dry have been especially dry, and the areas that are usually wet were especially wet,” he said of recent years.

As for 2020, weather in Colorado brought new surprises. August was a full 6 degrees warmer than average, which fed into extreme wildfires that erupted across the state.

In September, La Junta recorded its hottest day ever for the month — 108 — only to be followed weeks later by one of the state’s earliest snows.

Overall, though, the big story continues to be the severity of the drought.

“Kiowa County has just been off-the-charts dry going back to spring,” he noted, singling out one of the hardest hit locations.

“Expect La Nina to persist through the winter and into the spring,” he concluded. “The pattern with La Nina is typically cool and wet to the north and warm and dry to the south. Much of our area is in the middle and could go either way, but the expectation is the further south you go, the more likely it will be drier than normal.”