Drought could cost millions in lost exports

Aug 3, 2012

As the worst drought in decades continues to burn up crops across the Midwest, tight supplies and higher feed prices are shifting business plans and changing the export outlook.

In recent history, drought has been isolated to various regions of the country, rather than a widespread drought threatening most of the country. Last year, for example, drought was centered primarily in the Southern Plains.

According to Kevin Good, senior market analyst for CattleFax, 70 percent of the U.S. cattle inventory is located in regions of drought.

“The widespread drought has ultimately led to the worst pasture conditions in the past 15 years,” Good said. “The U.S. calf crop is down 800,000 head. The bottomline, when all is said and done, the cattle herd will decrease by about 500,000 head. This is compared to a 900,000 decrease a year ago, so we are seeing a liquidation but at a slower pace than last year.”

Despite the obvious challenges facing America’s cattlemen and women, Good offered reason for optimism. Consumer demand re mains strong with solid retail and foodservice sales. As consumers continue to demand nutritious beef, cattlemen are given reason to remain in the cattle business and avoid liquidation. National Cattlemen’s Beef Association (NCBA) CEO Forrest Roberts said the challenges cattlemen are facing are serious, but we are encouraging them to trust the market signals and maintain cowherds if possible.

“The thing we have to remember is that consumers continue to prefer beef on the dinner table. Consumers are sending very clear signs to cattlemen to hang tough and continue producing the protein they prefer most,” said Roberts. “There is no doubt this will be tough. But cattlemen are tough people and I am confident we will weather this storm and rebuild the U.S. cowherd once weather conditions improve.”

While producers are trying to focus on the positives, the negatives are still adding up, including the cost to the U.S. food export industry, which has the potential to lose billions. Reports indicate developing nations that have been slowly increasing meat consumption may be forced to cut back.

With the U.S. accounting for over half of the corn export market, and almost half of the soybean market, producers in other countries are in the same boat as the states, looking for alternative feeds. In addition, the effects on other products made from corn and soybeans are just starting to be assessed.

Exports of corn, soybean and meat products totaled $53 billion in 2011.

The losses have also created a stir on the import side. According to the Wall Street Journal, Smithfield Foods Inc., the world’s largest pork producer, said it will be importing corn from Brazil. While this is unusual for a U.S. livestock producer, it could be cheaper to buy and ship corn from there to the eastern U.S. than to get it from the drought-stricken Midwest.

According to the Financial Times, the last time corn was imported to the U.S. was in 2008, and that was as seeds, not as animal feed.

While the U.S. is trying to come to grips with a possible corn shortage, Brazil has had a record 70 millionton crop. According to a USDA estimate, this year Brazil could export 14 million tons of corn.

In Australia, the country’s largest beef processor, JBS, says the effect of the U.S. drought will be felt worldwide, including Australian meat export prices.

JBS Australia’s chief operations officer Brent Eastwood told reporters that the extreme drought means more cattle will be processed in the U.S., flooding one of Australia’s key markets for hamburger beef.

“This year it’s not so much about Texas, it’s the Midwest and it’s still a huge turn off of cattle and that’s part of the reason we’re seeing depressed prices for imported lean meat,” he said.

“Because at the end of the day, the domestic product is used for ground beef and the imported product is more used for hamburger meat, and the ground beef category in the supermarket has grown.”

In New Zealand, producers are seeing potential benefit to their country from the U.S. drought as producers sell off record numbers of cattle.

According to reports, last year, 42 percent of New Zealand’s beef was exported to the U.S., making the U.S. New Zealand’s biggest beef export market. This year, they are expecting growth in their U.S. beef exports because of a potential shortage in the states.

While NCBA did its best during its midsummer conference to put a positive spin on the drought, the bottom line is the current drought has any potential herd building on hold for the time being and producers are doing their best to get through the summer, in addition to searching for winter feed supplies.

For those producers selling livestock in wake of the drought, NCBA has provided some tips in what would be considered “excess” sales of normal levels due to shortages of water, feed or other drought-related consequences. The income tax on the gain from the sale of these animals can be postponed.

There are two options:

• Code Section 451(e), allows postponing reporting taxable gain on the additional sales of any livestock for one year;

• Code Section 1033(e), allows not only the postponement, but the avoidance, of paying taxes on the gain of a sale of breeding, draft or dairy animals if they are replaced within a specified time frame.

To qualify for the 451(e) tax option, the producer must be in an area that has received a federal disaster declaration. The sale can have taken place prior to the declaration, however, if the weather-related condition that caused the sale existed at the time.

Under the 1033(e) option, if the producer’s county was eligible for federal disaster assistance at the time of the sale, the replacement period begins when the livestock are sold and ends at the conclusion of the first taxable year after the first drought-free year for that area. If the producer is not in an area declared eligible for disaster assistance, the replacement period begins on the date of the sale and ends two years after the close of the tax year in which the involuntary conversion occurred. — Traci Eatherton, WLJ Editor