Animal ag slogs head in recession

WILLMAR, Minn. -- Expect the livestock industry to remain in an economic slump as the nation comes into a slow, uncertain economic recovery.

That's a chart-based message from Jim Kielkopf, chief economist for AgriBank FCB of St. Paul. Kielkopf works for one of five similar "wholesale" banks in the nation that make up the Farm Credit System. He spoke recently at the Strategic Animal Agriculture Conference in Willmar, Minn., that economic indicators point to a modest recovery in the animal ag sector in 2010, but he cautions: "We could get a double-dip recession -- not a bet I would want to take this year."

The economist says it seems likely unemployment could "remain high for years, depressing demand for high-value ag products, particularly animal products."

"Animal agriculture producers will have to be good risk managers to thrive in the next few years," he says, emphasizing they need to, "Hedge, hedge," and "Hedge."

Specifically, Kielkopf looks for herd reductions in hogs, which could lead to a "break-even to profitable" year for hogs

True, the recession looks bad, but it needs to be looked at in context. The current 10 percent unemployment rate is discouraging, but it still can't be compared directly to the Great Depression, where unemployment at one time was up to 25 percent.

That's because of government spending. To prevent a slide from recession into depression, there has to be "one fool in the room that keeps putting their money out -- that's government." And while that government spending provides "a level of security for everybody in the economy," he acknowledges, "unfortunately, that comes with a cost we'll all pay up later."

Kielkopf says that one of the keys to the persistence of the recession so far is that businesses have stopped investing. People are spending less money and are "rationally too afraid of doing it themselves until somebody else does," he says.

U.S. trade -- both exports and imports -- has taken a nose dive, but those indicators are starting to come back. Agricultural trade historically has had $10 billion in exports and $4 billion in imports, which means it is "one of the few industries where we're competitive with the world anymore."

Looking back to 2009, Kielkopf says net farm income dropped by more than 40 percent. Income declines in the livestock sector were led by dairy, at 45.6 percent reductions.

"That left a lot of businesses (financially) underwater," he says.

Animal agriculture -- particularly pork, poultry and turkey -- have some challenging facts to contend with. In pork, sow numbers have continued to decline, but slaughter numbers and saved pigs per litter and market weights have increased.

On the consumption side of the coin, the industry has become export-oriented, even as per capita domestic consumption decline.

The turkey industry saw lowered demand because of worldwide recession. "A lot of turkey didn't get sold in 2008 and 2009," he says, as margins went negative to the 10-cent-per-pound area.

The pork industry, for example, must export up to one-fourth of what's been produced and could respond to recovering trade.

No beef bounce

Beef is more dependent on the domestic economy, where Americans are consuming less meat per capita, he says, so has less upside potential in the year.

Consumption has leveled off in most products in the 2000s. Beef and veal consumption has declined since the 1900s, turkey peaked in 2004, and pork has been down since 2006. Even chicken consumption, which peaked in 2005, is on a downward trend. Partially offsetting that for now is that the U.S. population has continued to grow slightly. Producers must decide whether to go for more production or "higher-value-added" strategies, including organic. Kielkopf says the biggest losses in 2009 came when some of the "best-in-class" players in the animal ag sector "stopped hedging, one way or another" in the wake of the 2008 run-up of grain prices.

"There were casualties," Kielkopf says. "Mainly, those occurred because people went off disciplined hedging strategies. Dairies that were able and willing to lock in their $1.50 to $2. margins" survived, while those who "wanted to cash in on $25 milk are underwater severely and are liquidating," he says.

He says there was "not a lot of excuse" for managers to take those risks.

"When prices went up, they decided, 'I'm going to gamble like my dad did when he had a 40-acre farm, but if you're building a several thousand-cow operation, or several thousands of hogs, you're not farming like Granddad. This is a big operation, a factory operation, with lots of variables, and it requires sophisticated ways of controlling risks."

Playing chicken

One wild card for the broiler industry is Russia, Kielkopf says. Fifteen percent to 19 percent of the U.S. production is exported, but that's threatened because Russia in December imposed quota restrictions in poultry imports. Ostensibly, the reason was because the government doesn't approve of the U.S. practice of treating products with a chlorine rinse, to prevent foodborne illnesses.

In 2000, 43 percent of all of Russia's chicken consumption came from the United States, a figure that declined to 30 percent in 2008. Still, about one in 20 chickens produced in the U.S. has been going to Russia, an amount equal to about one-fourth of U.S. chicken exports.

Kielkopf says Russia may replace those imports with increases from Brazil, the European Union or elsewhere.