1. Interest rates will go up.
2. Supply chain issues are persistent but should continue to improve as the year progresses.
3. Inflation, especially as regards energy, will increase, leading to higher costs for transportation and shipping.
U.S. energy stocks to use have been depleted after two years of growing demand and slower production. “We've really drawn down on the stocks, and we haven't been in a situation where we've been able to see enough production increase to offset the demand for all of our products related to the energy sector,” Murphy said. “This is really important because when you start talking about those types of stocks, and you couple that without increasing demand, you put yourself in a situation where the market needs to get high enough to try to ration the usage of our product.”
The U.S. is a long way from getting back to the pre-COVID-19 levels of production and supply in crude oil. The rig counts are recovering slowly because of labor issues and a lack of investment in fossil fuel production. While the federal estimates predict a slow recovery for fossil fuel consumption, Murphy suggests a quicker recovery to pre-COVID-19 consumption levels and that the gap between global production and global consumption will become much smaller. “We could easily see prices up there towards $100 or $110 a barrel. … We’re certainly going to see crude oil prices move higher.”
Higher prices aren’t the only things to watch out for. “We have to expect a lot of volatility in this market, and that'll be the case for many of our commodities that we deal with, energy in particular,” he said. “Taking that back to the economic side of things, the cost to be able to transport goods and services, cattle and grain, is going to be more as we go through 2022.”
Feed grain acreage
Corn plantings are down 1.5 million acres from last year at 91.8 acres; soybeans are holding steady at 87.3 million acres. Winter wheat acres are up 749,000 acres. Spring wheat is going to be the key. Murphy predicts a swing from corn production into spring wheat in Minnesota and the Dakotas, bumping the planting up by 1.5 million acres. Cotton acres are also expected to increase by about 800,000 acres. “That shift in that northern Corn Belt will be the difference in terms of us losing corn acres and that shift going into spring wheat.”
Murphy said ethanol producers have been as profitable in the last several months as they have been in two years and are trying to build stocks up to meet that demand out there, so the amount of corn being utilized for ethanol production has increased. Domestic demand for ethanol should increase steadily as more people get out and about as COVID-19 restrictions lift.
Exports are more of a wild card. China will continue to have demand, but that can change depending on their problems with African swine flu and resulting demand (or lack thereof) for corn. The U.S. is one of the few countries that has corn to export, so the market and demand should remain steady and relatively balanced, regardless of crop yields in South America.
Corn yield is estimated at about 180.6 bushels per acre in 2022-23. Murphy said corn prices should, fortunately, remain elevated, since higher costs for inputs like fertilizer mean higher breakevens across the board. “We know long term that farming tends to be a break-even business like many commodities, but that cost of production is high, and it'll sustain itself because of all these inflationary pressures.”
PHOTO: CattleFax analyst Mike Murphy outlined three key components of the current and future market situation at the 2022 National Cattlemen’s Beef Association Cattle Industry Convention in Houston, Texas. Photo by David Cooper.
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