Things could be looking up for farm equipment dealers that count purchases by livestock producers as a significant source of revenue, according to a new CoBank report.
A year ago, the livestock segment of the industry, with its reliance on utility tractors in the 40-100 horsepower range, was considered a bright spot in an otherwise dismal outlook for ag machinery sales. While U.S. high horsepower tractor sales were off by 13.6% for all of 2014, unit sales of utility tractors rose by 7.2%. But as the demand for livestock cooled in 2015, sales of medium-range tractors declined by nearly 3%.
But the supply glut that plagued U.S. beef, pork and poultry markets last year and ratcheted down margins is expected to ease in 2016, according to a new research report from CoBank. The bank, headquartered outside of Denver, is a major agribusiness lender, says leading indicators point to animal protein supplies moving toward a state of equilibrium, with protein stocks more in line with overall levels of demand.
“It’s clear that in the coming year, the headwinds and adverse conditions created by excessive protein stocks are clearing,” said Trevor Amen, animal protein economist with CoBank. “Surprisingly strong U.S. consumer demand helped lay the groundwork for improving market conditions in the coming year, meaning the net trade balance is expected to shift toward growing exports and fewer imports. This is welcome news for U.S. beef, pork and poultry producers.”
On the Horizon
In the first half of 2016 protein exports are expected to remain somewhat of a challenge. “But conditions are predicted to improve over depressed 2015 levels due to a variety of economic factors,” added Amen.
Meanwhile, imports of lean beef should slow significantly and domestic consumer demand for beef, pork and poultry is anticipated to remain strong and supportive of prices. Supply imbalances have already begun the correction phase, with supply and demand expected to achieve equilibrium by about mid-year. The strength of consumer demand going forward will impact how much and how soon U.S. meat prices change.
For instance, meat demand in the restaurant sector continues to grow. The Restaurant Performance Index and the Expectation Index each indicate positive restaurant business conditions. Combined with lower gas prices, current consumer attitudes indicate a willingness to spend more at restaurants versus in-home meals during 2016.
Price outlooks are mixed:
• Pork and chicken prices have an upside potential compared to last year’s low levels, based on adjustments made for future production.
• Beef prices will likely remain under pressure for the next two years, however, as the industry is coming off cyclical highs of 2014.
Of course, optimism for 2016 should be tempered by the oversupply lessons of 2015.
“Total red meat and poultry production set an all-time high in 2015,” said Amen. “Combined with fewer exports and more imports, total domestic meat supplies surged by 4.4%, the highest year-over-year increase in 40 years.” That increase in supply translated to an additional 9 pounds of protein per person — historically, protein supplies rose an average of 0.8 pounds per person per year from 1960 to 2015.
As the market works through the recent protein oversupply hangover, the long-term outlook remains positive, especially with continued global middle class growth. “The increasing demand for a higher-quality diet likely provides domestic protein producers with significant opportunities in the next decade,” concludes Amen.
A synopsis of the 2016 Protein Demand Outlook Report is available at www.cobank.com.