Manufacturing News

Trend watch: Higher beef prices, corn uncertainty in store for 2013

Flat production and rising feed prices have led many to predict high future beef and corn prices.

According to Rabobank, global beef prices will rise to unprecedented levels in 2013 as production remains basically flat and the world economy remains sluggish.

The natural recovery of herds in Brazil, Australia and Argentina led to a 2 percent drop in the Rabobank Global Cattle Price Index in Nov. 2012, but rising grain prices and a reduction in herds in the US and Europe will continue to inflate prices in 2013. The effects of the reduction in Northern Hemisphere cattle won’t be felt equally throughout the global market, though, according to Rabobank analyst Guilherme Melo.

“Companies located in South America, particularly in Brazil, should benefit from herd recovery and the acceleration of the economy, which offer processors an opportunity to increase or sustain their margins,” says Melo. “Nonetheless, headwinds for the South American industry probably blow from the Middle East and North Africa, where companies are likely to face a tougher environment for expanding exports in 2013.”

One bullish factor for the industry is the likelihood a decrease in pork and poultry production in response to rising feed prices. A decrease in production could push pork and poultry prices closer to that of beef, which could shift demand.

For corn farmers, 2013 will be all about risk management according to Purdue University’s Department of Agricultural Economics. That’s because three years of below-normal corn yields and drought could mean record-high 2013 prices if the drought continues—or the largest year-over-year decrease of all time if it ends.

Farmers will likely look to minimize risk through two tools. First, many will choose to purchase crop insurance. This option is attractive because it doesn’t limit their potential revenues if prices improve.

Second, farmers will likely look at their marketing decisions relating to forward-contracting. Forward-contracting locks in prices for expected crops, but farmers could lose out if prices go up after an agreement has been made. Purdue’s report recommends farmers protect themselves by limiting the percentage of production that is contracted for sale in advance, or by purchasing out-of-the-money call options to protect themselves against rising prices.

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