Current Edition

current edition

With 2016 already in the books, we are looking ahead at the New Year and pondering some of the factors that could drive livestock markets for the next 12 months. Any such list is inherently flawed because the real market movers tend to blindside the market.

As Rumsfeld would probably say, it’s the unknown unknowns that really get you.

With this in mind, below are few items to consider.


Meat demand and consumer preferences

When we look at meat demand and consumer preferences, this is one of those topics we have been highlighting in our year-end review for a number of years. It is always important.

We think there has been a shift in the way in which U.S. consumers approach meat protein. Fat is no longer taboo. The industry is no longer trying to eliminate all traces of fat from its products at the detriment of flavor.

Recently, we noticed some marketing materials from the National Pork Board informing consumers that “marbling can improve pork’s flavor and moisture.” Too bad we need to remind consumers of this, but good for the Pork Board for doing so. It’s about time we bring the focus back on flavor.

What is important to the consumer today above else appears to be authenticity. And a well-marbled, juicy steak speaks for itself. Some new dietary work done also is raising doubts about long held beliefs about the dangers of fat.

Economy and incomes

The state of the economy directly impacts consumer meat demand. While we saw somewhat softer consumer demand during the first half of 2016, the situation shows signs of improving.

Consumer incomes are increasing at a faster pace, unemployment is down to pre-recession levels, and consumers feel more wealthy, thanks to higher home values and equity markets.

With a hard fought election battle behind us, we think the consumer also feels a bit more relaxed and willing to return to their normal daily routine. Prices at retail have been slowly adjusting lower, and in time, this should expand protein availability and accessibility for U.S. consumers.

International trade and the U.S. dollar

Everyone involved in the U.S. meat industry knows that we are heavily dependent on export markets. The United States is a low-cost meat producer, with significant natural resources, and is a very reliable supplier. These are all important considerations for global buyers.

As incomes in a number of large, populous nations rise, they opt to upgrade their diet to include more protein. Over 20 percent of all U.S. pork, 16 percent of all U.S. chicken and 10 percent of all U.S. beef currently goes to export markets. As U.S. meat supplies are expected to expand further in 2017, we will need all this export demand to remain in place and grow further, which is why markets tend to react negatively to any indication of export disruptions.

The strong U.S. dollar generally is negative for exports, but by far the most significant negative impact is from non-tariff trade barriers. This is a fancy way of saying some nations will look to raise barriers in order to protect special interests within their borders.

Drought

Grain production in the U.S. in the last couple of years has exceeded all expectations. The last USDA projections pegged U.S. corn yields at an all-time record 175 bushels per acre and corn production at over 15 billion bushels.

Ending stocks are some of the largest of the past decade. There is a lot of corn available for livestock and poultry and feed costs for producers are some of the lowest in years.

But Mother Nature holds the cards on this one. The drought monitor currently shows areas in the Southeast are experiencing exceptional drought. So far, the Corn Belt has been spared, but this is a real risk.

Pasture conditions for livestock producers also have been above average the last two years. This has provided the opportunity to retain more heifers and bulk up hay supplies for the winter. It’s all been good and helped bolster cattle supplies.

Expanding drought conditions could quickly reverse that, initially pushing more calves onto feedlots, with a short-term bearish outlook, but setting the stage for a more bullish beef market in 2018-19.

Many ranchers today would like to transition out of ranching into and retirement, but don’t want to pay the capital gain tax associated with a sale. Fortunately, there are ways to bypass taxes on the sale of land. 

The most common method for bypassing capital gain taxes on the sale of appreciated land is to use a 1031 exchange.

Section 1031 of the Internal Revenue Code (IRC) states, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

To defer taxes on the sale of appreciated land with the IRC section 1031 exchange, an investor must purchase, or exchange into, other real estate. Contrary to what many agricultural families think, land does not need to be exchanged for other land. We can exchange land into many types of investment property, such as office buildings, rental houses, apartment complexes, storage facilities, retail strip malls, et cetera. Ironically, a family that is selling land and investing the proceeds into other types of property can often triple their income without having to work nearly as hard for it.

Income-producing real estate

The goal for most families who have sold their farm or ranch and are transitioning into retirement is to generate income. Most families want secure income-producing real estate they do not have to personally manage. 

While land can offer tremendous appreciation potential, it does not offer the cash flow returns we can generally achieve with other types of income-producing real estate such as office buildings, apartment complexes, storage units, retail centers, etc.

Effectively analyzing income properties can be very complex and is something best left to professionals. A commercial real estate investment professional can help identify and evaluate income producing real estate investments. With that said, it is helpful to understand some things when evaluating income producing real estate investments.

While location, supply and demand, and good demographics are important factors in evaluating real estate investments, when it comes to investing in cash flow real estate, one is mainly interested in buying the income stream the property offers. Therefore, the most important factor for evaluating income producing real estate investments are the numbers. 

Investors use many different approaches to evaluate investment properties.  We should be familiar with the different approaches as we begin our property search. 

Cap rates are one of many financial tools used by investors to establish a purchase price for an investment property in a given real estate market.

The capitalization rate, or cap rate, is a ratio used to estimate the value of income producing properties. It equals the net operating income divided by the sales price or value of a property expressed as a percentage.

Cap rates based on figures from recent transactions of buyers and sellers provide the best market value estimates for a property. If we are able to obtain reliable cap rate data, we can then use this information to estimate what similar income properties should sell for. This will help us to determine whether or not the asking price for a particular piece of property is too high.

The cap rate can be calculated by dividing the net operating income (NOI) by the value of the property.

Estimated property value is calculated by dividing NOI by the cap rate of the property.

For example, a property has a NOI of $140,000, and the asking price is $2 million. The cap rate is equal to $140,000 divided by $2 million, which is seven percent.

Another example is an office building that has a NOI of $150,000. Cap rates in the area for this type of property are eight percent. The estimated property value is equal to $150,000 divided by eight percent, which equates to $1.875 million

Chris Nolt is the owner of Solid Rock Realty Advisors and Solid Rock Wealth Management, sister companies dedicated to working with families throughout the country who are selling a farm or ranch and transitioning into retirement.  For more information call 800-517-1031, or visit solidrockproperty.com.

By Wyoming Governor Matt Mead

I have often shared my grandfather’s advice, “Where you find a blade of grass leave two.” These words, to me, embody the farmer, the rancher – all those engaged in ag. Ag producers value the land, animals – wild and domestic – crops and open space. Wyoming is a place where for generations we have worked to leave two blades of grass for one. Cowboys, cowgirls and the Code of the West were born in ag and today represent Wyoming values in all industries. Ag has been integral to Wyoming since before statehood and, more than 125 years later, is Wyoming’s third largest industry. It is a main supporter of the number one and two industries – energy and tourism. Wyoming ag is standing strong as Wyoming is strong.  Here I will address a few of the many things important to ag and all of Wyoming. 

Wyoming has established itself as a leader of the nation. We have earned Standard and Poor’s highest credit rating, AAA, four years running. We are the state with the Best Return on Investment for Taxpayers (2014), the Lowest State and Local Tax Burden in the Country (2014) and the Second Highest Increase in Gross Domestic Product (2013), among other accolades. I talk about these things, not to brag, but because they mean things are going well and people in Wyoming are doing well. These are indicators of our success historically and today. We are in a good place. There are challenges, to be sure, and we continue to be vigilant and to lead the way as we work on them. 

Last year the EPA proposed new rules defining Waters of the United States. These proposed rules have sweeping negative implications for Wyoming and for ag. Wyoming has taken the lead in challenging these rules and in educating the public and policy makers on their excessive reach. We saw success when the EPA withdrew the interpretive rule redefining agricultural exemptions. The balance of the rule proposal contains onerous provisions and extends the authority of the federal government into areas of state primacy.  

Wyoming, after nearly three decades, successfully delisted the wolf. Wyoming’s plan provided for 10 breeding pairs and 100 individual wolves in the state and an additional five breeding pairs and 50 individual wolves in Yellowstone National Park. The plan worked. The wolf continued to be recovered, and reasonable controls – Wyoming controls – were in place. When the delisting was challenged in court, the judge found the wolf was recovered and that Wyoming’s management was effective but still overturned the delisting. We are fighting this decision on multiple fronts, but it is clear that the Endangered Species Act is broken. We need to work on the Act, as we continue to work on delisting grizzly bears and ensure that there is no need to list the sage grouse. We should recognize that these species thrive in great part because of ag and, without ag, the challenge would be a greater one – perhaps insurmountable. Wyoming’s fight against federal overreach will not stop.

This year I introduced my water strategy. Something like this – a state water strategy – had not been done before. Water is tied to everything we do in this state. It’s tied to everything we have done, and it’s tied to everything we are going to do in the future. The strategy was developed over the last year, with wide public input. It is a good strategy and has 10 initiatives including a "10 in 10" proposal – 10 small reservoir projects in 10 years. The time to protect Wyoming water is now. The proposed budget contains more than $46 million for water construction and rehab projects. Water development is an ongoing effort.There are also other infrastructure projects in my supplemental budget. I believe my budget recommendations, many of which are in the budget that is before the Legislature as I write this, are conservative. The supplemental budget will keep operating costs relatively flat and most appropriations are not recurring. 

These are exciting times, and this is just a glimpse of issues and topics of interest to ag producers. But every essay has its end, and I end by reiterating that Wyoming is strong. I wish you green grass, healthy calves, abundant crops and good prices in 2015.

The United States country of origin labeling (COOL) for beef was implemented in 2009.  While opponents to such consumer transparency issues have claimed that COOL was supported by those U.S. cattle producers wishing to restrict trade, I can tell you that was never the intent and the facts simply don’t support this propagandist tactic.

From 2005-09 the Canadian cowherd declined by 18 percent, from around 5.4 million cows to 4.3 million cows. Interestingly, from 2010-14, after COOL implementation, there has only been a minimal contraction of one to two percent annually. 

While I’m not saying COOL had anything to do with these herd stabilizations, what an interesting coincidence

What has been really impressive is to look at the volume of live cattle and beef imports from Canada as a percentage of the Canadian cowherd. One would have thought that as the Canadian cowherd was shrinking, the percent of product for export after domestic use in Canada would have dropped. However, it appears the U.S. is taking a larger and larger share of Canadian production – both cattle and beef – as a percentage of their cowherd, with 2013 and 2014 representing the highest at somewhere around 55 to 57 percent and that’s figuring a 100 percent calf crop.

When you look at Mexico, it is basically the same. The Mexican cowherd began a steep decline in 1994 when Mexico had about 13 million beef cows. The cowherd shrank to 10 million in 2002 and 6.7 million in 2007. Interestingly, about the time COOL was implemented in 2008-09, those numbers started leveling off, and in 2011-12 reached 7 million head. Numbers then fell again to 6.7 million in 2013 and 6.8 million in 2014 following a severe drought.  

Interestingly, even though Mexican cow numbers had dropped, three of the five top cattle import years since 2005 came after COOL was implemented. And yes, they had a drought, but one of those years was 2014. Amazingly all this has happened at a time when the Mexican government initiated programs to add more USDA-approved packing plants and rapidly worked to expand cattle feeding in Mexico to capture more value for the economy.  

Under these programs, beef exports have increased to the U.S. now making Mexico the fourth largest exporter of beef to the U.S. In fact, we saw live animal equivalents of Mexican beef imports rise from 60,000 in 2008 to about 400,000 in 2014. When you add it all up, five of the top six years of cattle and beef equivalent have come since COOL was implemented. 

If Canada and Mexico were truly being discriminated against, as determined by the WTO panel ruling, we should be taking less of their production, not more. However, a common theme through their market reports is that a strong U.S. market has been driving these exports to the U.S.  2014 will be the second highest year for cattle imports from Mexico and Canada into the U.S. and with the smallest cowherds on record.  That’s pretty amazing and certainly does not support claims of discrimination.

On another note, with increased liberalization of U.S. health protocols on bovine spongiform encephalopathy (BSE) and foot-and-mouth disease (FMD) to South American countries and the European Union and increased free trade agreements on the horizon, one can only expect increased imports into the U.S. 

This only makes it more important that U.S. producers have the tools necessary to move from commodity markets to more value-based markets with consumers, and COOL will be critical in allowing both U.S. cattle producers and U.S. consumers to differentiate their beef, as we have already done in many foreign markets. As one looks out on the horizon, one of the highest values consumers will be placing on the food they purchase in the future is “how and where it is produced.”

Leo McDonnell ranches in Columbus, Mont. and Rhame, N.D. He also sits on various industry association boards