Kottke : A World Hungry For Meat
After three consecutive quarters of much-greater-than-expected demand for U.S. corn and soybeans, confounding every analyst’s projections and strengthening current-year prices sharply, a turn to excellent planting and growing weather in Northern Hemisphere abruptly collapsed forward prices for corn, wheat, and to a lesser extent soybeans. We confess bewilderment as to why, with world demand this year so vastly larger than expected, forward price should not be well-supported by demand continuing on this surprisingly steep trajectory.
World growth in meat consumption, which translates into greater usage of grains and protein meal, appears to be on a tear – “appears,” because we have seen no analysis of causality beyond reasons logistical, financial, and political which channeled a disproportionate share of feed-ingredient business to the U.S. In reality month after month, combined shipments of soybeans and meal from the three main sellers U.S., Brazil, and Argentina have totaled well above expectations, yet demand does not yet appear satisfied. From $400/ton early in the crop year, nearby soymeal futures are now at $500, an extraordinarily high price which has not appeared to dampen demand.
Additionally, world trade in meat continues to expand despite record-high prices, with the share of U.S. production exported now at about 22% of pork, 19% of poultry, and 10% of beef. While beef production has been severely impacted by drought in High Plains pastureland and high feed prices, hog and poultry margins and exports are impressively large. These are labor-intensive industries in a relatively high labor-cost country, yet they’re selling more meat at record prices to countries with far lower per-capita income than U.S.
Last year, acquisition of U.S.’ Smithfield Foods, world’s largest pork producer, by China’s Shuanghui International exemplified that trend, and hints at the dynamic potential ahead in U.S. agriculture despite repeated self-destructive, uneconomic government efforts to limit agricultural production. In 2009 giant Brazilian meat producer JBS S.A. purchased a majority of Pilgrim Industries, the U.S.’ largest poultry-only producer, which had bankrupted in the wake of legislation mandating massive diversion of corn from feed into auto-fuel production. Today, JBS is in a bidding war for meat processor Hillshire Brands, raising the ante by $1 billion recently.
That foreign interests have so aggressively purchased very large chunks of a major U.S. industry reveals much about where the anticipated growth in meat consumption lies, and where the most money can be made producing it. It would appear there’s more going on within surprisingly brisk world grain trade this year than just the recent problems associated with purchasing feed from non-U.S. suppliers.
An important trading position related to the above, focused on by your managers in recent months, has begun to gain cash-market corroboration. As we enter the last, summer quarter of the corn crop year, in which record-high usage is anticipated, this position should yield some profits matching the “stealth” world demand picture.