Dan Basse, president of AgResource Company, gave attendees of the virtual Certified Angus Beef Feeding Quality Forum, Aug. 25, a high level look at how the world looks in terms of COVID-19, and how it’s affecting the United States economy and cattle producers.
Globally, the kind of volatility the markets have seen and can offer producers is something to take a deeper look at, he said.
“I don’t think any of us a year ago would have thought that we’d be sitting at home watching a computer screen while the economy basically is struggling,” Basse said. “We’ve lost over 3 million small businesses since the start of this health scare. We’re concerned that may rise or grow to something like 6 or 8 million businesses by the end of the year.”
Small businesses are the heart of the U.S. and the agricultural sector hasn’t come out unscathed. Many Americans are questioning when this is going to be over, Basse said, and get back to some kind of normal.
“We only see that happening with some kind of health aid,” he said. “We’re looking at probably the first quarter of next year that a vaccine will be available, and we think at that point it will take six to nine months, if it’s a two-step vaccine.”
Finding a vaccine essential
Basse believes that once the disease is under control, the U.S. economy will get back on track. He doesn’t see it happening until at least a year from now though.
“We think it’s about a year from now, maybe August of ‘21,” Basse said. “So we’ve got some time to go through this before we’re all back into it.”
The U.S. food service industry is also struggling, and in Chicago where Basse is located, they’re only back at about 40% of normal. Dining is “still basically outdoors,” and he sees many of the restaurants shutting down when the weather turns cooler.
“The food service industry has been very important to the U.S. cattle industry,” he said. “We’re still believing they will struggle until we get to next spring.”
Basse said last year, 51% of Americans spent more money outside the home for food than they did preparing meals inside the home.
“It’s a big change to have an industry crippled as it is due to health concerns,” he said.
There is also massive debt piling up during COVID-19, and Basse said its approaching $26.8 trillion, with world debt from the government sector over $59 trillion.
“These are debt levels never seen before,” he said.
Inflation concerns
And what does that mean for recovery of the economy? What about inflation?
“Today there’s no evidence said core inflation is much above 2%, but I would imagine as we go forward, there will be shortages that produce a more inflationary tailwind than what we’ve been seeing before,” Basse said.
Since the trade agreement between the U.S. and China was signed back in January, officials have made some progress, Basse said. Both parties seem to believe they’re headed in the right direction.
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“The U.S., of course, is more actively selling corn, soybeans and meat products to China,” he said. “The month of July China imported a record amount of pork from all sectors.”
Basse is worried about the trade agreement since President Donald Trump is not giving any indications he plans to pursue a phase 2 or 3.
“Get used to a world without China,” he said. “That would probably not be good for U.S. agriculture. It really proves in my mind, as an economist, that these tariffs are easy to put in place, but they’re very difficult to remove.”
The U.S. dollar has been weakening against the euro, but it’s held it’s own globally so far. Currencies in Brazil, Argentina, Russia and Ukraine have been weakening versus the dollar, but the euro has kind of stood up along with the Japanese currency.
“(This) indicates to us anyway that Brazil is going to be a very formidable foe in the world grain and livestock markets for a long period of time,” Basse said.
Basse said AgResource’s general view is that because of productivity gains, U.S. beef prices will stay relatively depressed. Even though the corn market was up $0.10 the day of the webinar, corn fields are experiencing late season dryness, and the derecho winds in Iowa so the markets got a little bit of a lift.
“But we think that this lift will be over with as rains are projected to fall sometime next week,” he said. “I’m kind of looking for a high in the corn, soybean and wheat markets in the week ahead.”
For cattlemen this should mean there may be a relaxation in price, but it’s possible if once fall harvest comes and the basis gets weaker, it might be an opportunity to maybe look at forward coverage.
“Our estimate is that December corn futures will peak somewhere between $3.60 and $3.70 bushel,” he said. “Today the U.S. cattle market is struggling between the uncertainties of politics and, of course, COVID in the record large beef domestic demand that is there.”
Values
Basse expects the first quarter cattle prices to be a little over valued. Things have shifted a little bit and placements have risen, providing more beef supplies.
“I wish I could be more bullish on the cattle market,” Basse said.
Prices in the $114 to $117 range could give ample opportunity to hedge and lock in some margin.
Basse later discussed the farm revenue aspect, and noted outcomes this year will be determined by the government payments received.
“This has never been seen before,” he said. “This is really uncharted times and when we talk about the economies both here and globally, there is an element of risk in his outlook relative to COVID in what’s going on.”
It’s hard for him to get overly bullish on U.S. agriculture until he sees a significant drop in the U.S. dollar, and thinks that could happen if the debt levels continue to climb.
“But here today the U.S. economy is fragile and we really need to start getting out that aid again for the next package—that third tranche if we’re going to keep the U.S. economy on track,” Basse said. “But for farmers, again, 40% to 45% of your net revenue coming from the U.S. government is something that I never thought I would see in my career.”
As for the global economy, there was a downward revision in June of 5% global gross domestic product rates. Not every country will see negative GDPs but the vast majority might see declines from 5 to 10%.
“Now everybody is forecasting a big shift upwards in 2021,” he said. “Everybody’s banking on a vaccine or a strong therapeutic. It may happen, but I believe that a lot of these forecasts are overzealous because of the large amounts of debt that are being built up.”
Massive concern
As he mentioned earlier, the debt levels are at “insane levels,” and they could grow further depending on if there’s more aid packages. These debt levels will offer some additional risk, however.
“Now I don’t think government loan rates or interest rates will go up anytime soon, he said. “But these debt levels are something that I believe will be a drag on the U.S. and world economy for many, many years to come.”
Basse looked back at previous GDP levels in major areas around the world, and believes rates back during the great recession were a little too high, but he expects countries like China and India to not have credit growth rates that were as high as expected.
“Over time we do think India will and China will become the world’s first and second largest economies,” he said. “The U.S. will take No. 3 by about 2025 or 2026.”
Basse is critical of the amount of debt that is being enabled by governments around the world.
“We need to look at the political winds that are blowing, the November election and what will happen in terms of us farmers getting diminished aid going forward,” he said. “I think we need to be what I call really managers of margin, understanding where feeding margins and planting margins are for crops forthcoming.”
Producers in South America are going to be playing offense or defense based on what their economies are doing and crop margins. The world has an abundance of grain too.
“It will be meats that I still believe will have an opportunity to service and be more robust going forward,” he said.
Kylene Scott can be reached at 620-227-1804 or [email protected].
