As we move into 2017, there is a flurry of prognosticators gazing into their crystal balls and trying to decipher what the new year will bring. Current political theater aside, producers are also at the forefront of trying to determine how the new year will play out. So, we’ve queried leaders from ag industry segments to get their take on the five things to watch in 2017.
Jeff Hartz, director of marketing, Wyffles Hybrids
Increased, and maybe dramatic, shifts in purchasing behavior.
With many growers looking at the third straight year of losing or making little money, end users may get more aggressive with changes in what and how they purchase. In some cases, it may not be a mindset of saving money or getting more efficient, it may be how to simply survive to get to a better day. Changes motivated by survival can be more dramatic and unexpected.
Growers willing to take more risk. And more production at risk.
Many growers have already shown they’re willing to accept more responsibility and management for pests as they switch to lower-traited seed options. As tight times perpetuate, growers will likely continue to scrutinize and dig deeper into input decisions that can shave production dollars from each acre, but that also represent more risk to productivity.
Continued migration to “local” brands.
When the biggest stories in agriculture revolve around large corporate mergers, and those stories perpetuate for years, and are accompanied by monetary figures many of us can’t truly comprehend, it shouldn’t surprise anyone that the person at the end of the purchase can feel a little empty and perhaps even exploited by brands he or she helped build. There’s an epidemic of lost or lacking trust in society, from our national leaders to our sports heroes. And it’s easy to see that lack of trust continue to manifest itself in brands that contradict their commercial images with commercial actions. When growers are looking for people and brands they trust today, they’re going to continue to increasingly align with more local and regional brands that deliver the desired level of performance or service – but with more respect for the end user.
More alternative financing options.
For a decade or more growers have had to secure the means to finance two crops simultaneously. But looking forward, it’s going to be increasingly difficult for the standard line of credit and cash flow management tools to handle all the financial responsibility for producing crops and carrying operations through until everything is marketed. Growers may find financing from untraditional sources, or with untraditional terms, to make ends meet.
Increased scrutiny of input “add-ons.”
An exploding ag economy five to eight years ago pushed huge sums of money into research and development of new technology – in everything from seed treatments to precision ag platforms. Many advancements from those investments are now becoming commercial and reaching growers. Unfortunately, they’re reaching the market in an ag economy much tougher than the one they were born in. Tools that add two or three bushels an acre, which perhaps represented $15-$20/acre benefits then, are increasingly viewed as more overhead with more risk today. So, many new advancements hold value for the grower, but they’re being scrutinized and evaluated in a much tougher way in a much tougher environment today.
Eric Fransen, Director, Market360 Grain
The U.S. Dollar Index broke out higher from a 22-month range after the November presidential election. Over the first few months on 2017, watch for the U.S. dollar to possibly rally another 6 percent to approximately 108. Such a rally could represent the U.S. dollar’s last leg higher for the next seven years, given long-term U.S. dollar cycles. A higher U.S. dollar will make it difficult but not impossible for agricultural commodities to rally.
The current pace of soybean export sales is 5 percent ahead of its 5-year average pace. The USDA is currently estimating exports of 2.05 billion bushels for the 2016/2017 marketing year. If this pace continues, it could mean the USDA estimate is short by 100 million bushels. Continue to watch the U.S. dollar. If it strengthens beyond the first few months of 2017, when South America has soybeans to export, U.S. exports could drop significantly.
Hedge funds have started to exit short positions in the corn market. In mid-September of 2016, funds were net short about 180,000 contracts of corn. Today they are net short 72,000. A continuation of this trend bodes well for corn prices. The last two times funds reversed net short to net long, the corn market rallied about 90 cents.
We’re on the verge of breaking out higher from an 18-month trading range in crude oil. If we see this breakout, crude could rally 50 percent before the end of 2017. This would likely need support from a weaker U.S. dollar. A weaker dollar and higher crude oil prices open a door to higher grain prices.
We have experienced good weather conditions for four straight years, leading to records crops. The odds of a fifth straight year of good growing conditions are exceptionally low. While weather is always a factor, it will be interesting to see if the current trend of good weather breaks.
The Rabobank Food & Agribusiness Research (FAR) and Advisory group has been releasing a series of outlook statements on the 2017 agricultural outlook. These treasure troves of information provide unique insight – both domestically and globally. Here are a few tidbits of information from their reports.
In the United States, meat production is expected to continue growing, but consumers’ appetites are being tested as record levels are reached. The strong U.S. dollar and uncertainty over future trading relationships with China and Mexico create potential headwinds for American producers. The U.S. is currently the world’s largest exporter of pork to China, excluding the EU. – Rabobank “Global Animal Protein Outlook 2017”
Although the fundamentals of supply and demand are suggesting slight price increases for several commodities, huge price rallies are not anticipated in 2017, as global inventories are very high and will buffer price swings. Global currency movements will once again have a strong impact on the prices of agri commodities. European pork farmers will face more challenges from U.S. producers who will export more competitively to markets that the EU currently serves. Staple food commodities like wheat, as well as corn and soybeans—key parts of livestock diets across the world—are being stored in record volumes, weighing on the prices which are expected to be paid to farmers next year. – Rabobank “Outlook 2017 – Bear in mind, stocks remain large”
Milk supply from dairy export regions has fallen sharply, by 2.6m metric tons in the second half of 2016, with milk volumes from Oceania and Europe severely challenged. In addition, domestic demand in the U.S. and Europe continued to strengthen, negating the need for further stock growth and reducing volumes available for export by 4.5m metric tons. As a result, global dairy prices have rocketed upwards, increasing by over 45% in the second half of 2016. Most of the domestic demand growth is for cheese and butter. Therefore, the spread in prices across the dairy complex stocks will remain wide, with demand for butterfat driving the market and surplus protein, including European stocks, weighing on the market. – Rabobank “Dairy Quarterly Q4 2016: Supply ‘Crunch’ Bite”
Mergers and acquisitions
Four major merger and acquisition transactions have been announced in the farm inputs sector over the past two years, representing more than $200 billion of deal value. These deals come as U.S. row crop farming faces a third consecutive year of economic stress—driven by record grain production and rising stocks, which have resulted in multi-year lows in grain and oilseed prices. Although each transaction is subject to a unique set of opportunities, challenges and uncertainties, the common thread is that input manufacturers are repositioning themselves to compete in an environment of lower farmer margins and more efficient use of inputs. The aforementioned merger and acquisition deals have different implications across the value chain, but Rabobank believes that input distributors are the most exposed to further margin pressure as the newly merged entities renegotiate selling commissions and concessions based on their enhanced market positions. — Rabobank “Consolidation and Consequences: Mega-Mergers and their Impact on the Farm Inputs Sector”
Changes in the machinery sector?
In Rabobank’s report: “The Dealer’s Choice: Options for Equipment Sellers to Reinvent Themselves,” researchers noted that facing a third consecutive year of declining sales, contracting net income, and a weak intermediate-term demand outlook, North American ag equipment dealers must transform in order to improve returns on invested capital.
While the leading players have already reduced inventory levels and consolidated stores, and are emphasizing ancillary services, growth remains challenging, given negative farmer cash flows. While consolidation remains a viable option to improve profitability, Rabobank sees product extension as a better way to capture value as the next phase of technology and mechanization take hold on North American farms.