California drought to impact northwest agricultural

 

Last updated 4/16/2014 at 6:18pm



Northwest agricultural markets are mostly stable to improving this spring. Wheat markets rallied late in the first quarter of 2014, driven in part by the volatile geopolitical situation in Ukraine. Northwest dairy producers are benefitting from near-record milk prices and lower feed costs than in the past three years. However, hay prices are increasing ahead of first cutting in the Northwest. Drought in California is expected to reduce hay yields and forage production in the state, resulting in increased demand for Northwest hay. Irrigation water shortages in California will also impact the quality and quantity of grape, tree-fruit, and row-crop production this fall, which should favor prices for Northwest growers.

The following highlights depict the general health of select industries included in Northwest Farm Credit Services’ Knowledge Center Market Snapshots, which are available at northwestfcs.com/resources.

Beef: Cattle and beef markets are strong entering spring 2014. Prices for all classes of cattle remain at record levels, and retail beef prices are increasing. Despite market signals for beef cattle producers to expand their herds, tight supplies will continue to support cattle prices for the foreseeable future. The number of cows and heifers to calve in 2014 is down from 2013, suggesting the U.S.’ beef cow inventory will shrink for the 19th consecutive year. Global and domestic beef demand is strong, but continued beef price increases at the retail level may challenge consumer demand.

Dairy: Dairy producers are benefitting from solid profit margins. Milk prices are at near-record levels, supported by historically high U.S. dairy product exports. Although feed prices are increasing, milk prices are rising faster than costs. Milk prices are expected to remain strong in 2014, but could be pressured lower by rising domestic milk production and increased competition in global export markets. Higher hay prices in the Northwest could also impact dairies’ profitability. Regional hay prices will be pressured by demand from California where irrigation water shortages will limit forage production.

Hay: The Northwest hay market is heating up. Widespread drought in the western U.S. is expected to reduce hay yields and forage production this season, particularly in California and Nevada. This is likely to result in increased demand and higher prices for Northwest hay. The improved financial position of Northwest and California dairies is likely to result in more competition for high-quality hay than in the recent past. California-based exporters will have a strong interest in securing sufficient hay to protect market share (and investments in infrastructure) built over the last several years.

Wheat: Wheat markets rallied late in the first quarter of 2014. Old and new crop prices are up approximately 30 percent from February 2014 lows, driven by uncertainty surrounding the U.S. winter wheat crop and a volatile geopolitical situation in Ukraine. Recognizing the world has ample wheat supplies, anecdotal reports suggest many Northwest wheat producers have taken advantage of recent market strength by forward contracting between 15 and 30 percent of their 2014-15 crop. Current wheat markets are pushing producers’ returns above Northwest FCS’ estimated breakeven price of $6 per bushel.

Potatoes: Northwest potato markets are stable heading into spring, with manageable supplies and generally profitable prices. Northwest potato stocks were down 11.0 percent year-over-year as of March 1. Given lower supplies, growers are limiting potato sales, anticipating shortages and corresponding price increases by season end. Current fresh potato prices range between $6.00 and $8.50 per cwt., depending on quality and grower location. Northwest FCS estimates potato producers’ breakevens between $6 and $6.50 per cwt.

Sugar beets: International and domestic sugar prices remain bearish, pressured by high sugar supplies. Northwest FCS estimates sugar beet producers’ breakeven prices between $35 and $38 per ton. Grower returns are projected at $40 per ton for the 2013 crop by the Snake River Sugar Company. Western Sugar projects grower returns of $35.21 per ton for the year. Given current market fundamentals, sugar beet growers’ returns are not expected to improve with the 2014 crop.

Apples: The outlook for the Northwest apple industry is positive, but tempered from last season. A larger U.S. apple crop has pressured Northwest fresh apple prices to levels lower than a year ago. As sales of East Coast and Midwest apples wind down, Northwest apple prices have firmed and are expected to stay strong through the remainder of the marketing season. The outlook for the 2014-15 apple crop remains clouded. Apple production in the Northwest is poised for a record year, but emerging weakness in export markets and uncertainty regarding labor availability could challenge the industry.

Wine/vineyard: The outlook is positive for Northwest wineries and vineyards. Global wine sales continue to increase and the Northwest has a growing presence on the domestic and world stages. Market dynamics have driven a rapid increase in wine asset and real estate investments from outside the region. California, the nation’s dominant player in the wine and vineyard industries, is afflicted by exceptional drought. Irrigation water shortages in key growing regions could cause smaller fruit and lower yields for the 2014 harvest and beyond. Prices for grapes and bulk wine throughout the Western U.S. could experience upward pressure.

Forest products: An overall trend of higher prices and increasing demand is evident in the Northwest’s forest products industry, but volatility continues to complicate management decisions. Lumber and panel mills remain cautious about increasing production in the current environment where price run-ups are followed by rapid downward corrections. U.S. fiber consumption is expected to continue growing in 2014, driven primarily by increases in housing starts. Although prices for lumber and panels are expected to increase, high log prices are expected to continue challenging the profit margins of mills located in the Northwest’s coastal markets.

Nursery/greenhouse: Market conditions remain mostly favorable for the nursery industry. Some nursery producers report that sales to date and orders booked (but not yet delivered) are up significantly from last year. Supply shortages of quality plant material exist, and buyers want assurances product will be available this spring. However, rough weather conditions throughout the East Coast and Midwest have slowed shipments of plant material, leaving most nursery growers with more inventory than projected. Improved weather should help most producers catch up on shipments by the end of April.

Northwest FCS is a customer-owned financial cooperative providing nearly $12 billion in financing and related services to farmers, ranchers, agribusinesses, commercial fishermen, timber producers, rural homeowners and crop insurance customers in Montana, Idaho, Oregon, Washington and Alaska. Northwest FCS is a member of the Farm Credit System, a nationwide network of borrower-owned lending institutions that provide approximately $194 billion in loans to rural America. For more information, go to northwestfcs.com.

 

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