Food for thought. Perspectives from Wells Fargo experts on critical topics and issues in the Food & Agribusiness industry.

 

Record cattle prices: Who is realizing profits?By Don Colter, Wells Fargo Agribusiness Consultant The cattle industry continues to set record-high prices for the price of feeder and fed cattle, and the consumer faces record prices for retail beef. Read more

The cattle industry continues to set record-high prices for the price of feeder and fed cattle, and the consumer faces record prices for retail beef. U.S. beef exports hit all-time highs in 2013 with $6.2 billion in exports. This represents a significant increase since 2004 when the beef industry experienced the disaster resulting from bovine spongiform encephalopathy (BSE), commonly known as mad cow disease, and beef exports totaled only $0.8 billion.

While some segments within the beef industry are enjoying high revenues and large profits, other sectors and players are facing tough times due to drought and other market pressures. Several large packing plants have closed over the last couple of years due to large losses, while many cow slaughter facilities continue to feel the pressure from reduced herd size and shifts due to long-term drought.

To really understand the state of the cattle industry, it is important to analyze the cattle and beef supply chain and the state of each. In each segment, the top performers continue to separate themselves from their less-competitive counterparts by industry-altering revenues.

Cow/calf production

While generally profitable in recent years, cow/calf operations have been limited by drought, supplemental feed costs, and leverage. Drought conditions over the past five years have caused large-scale liquidations of cow herds, primarily in the west and southwest. In drought areas, cow/calf operations that did not liquidate were often forced to ship their cows to areas with feed or purchase supplemental feed to maintain the herds. Reduced cow herds resulted in smaller calf crops. Because many producers don't have any feeder cattle to sell, prices are high. Tighter calf supplies will result in continued competition from stocker operation and feedlots trying to maintain occupancy levels.

Cow herds hit a 61-year low of 89.3 million head of cattle on January 1, 2014. Many analysts have looked at prices from the last five years and logically concluded that rebuilding will begin next year. They expect the cow herd to stabilize in 2014, and increase modestly in 2015. But drought pressure and higher feed and pasture prices can derail that development. Additionally, the cow/calf industry continues to undergo a major transformation as older operators exit, and in the southeast region in particular, many small operators who exited during tough times have not re-entered the industry. Still, record prices can stimulate major structural changes; higher returns on assets always bring in new competitors who see the world in completely different terms.

550 Pound Steer Price Beef Cattle Ranching:Profits B4 Taxes/Total Assets

Background/stocker operations

Background/stocker operations have been chasing a tight calf supply, helping to drive prices up, but profitability has been mixed in this segment, due to drought and supplemental feed costs. Those operations with adequate pasture and feed have been able to squeeze out profits. The background/stocker segment is becoming increasingly tied to specific feeding companies. With increased volatility of feedlot profits, the feedlot owners have a desire for pre-conditioned animals to more fully utilize their facilities.

750 Pound Steer Price

Feedlot operations

While there were rare times of profit for feedlot operators over the last six years, there were losses in overall fed cattle. Recent decreases in grain costs have provided relief for some operators. Record-high cash-fed cattle prices helped boost cattle feeding margins by more than $280 per head in mid-March for unhedged cattle. However, many operators have varied hedging strategies that limited their downside risk, but constrained their upside opportunities. Feedlots are also being forced to own a growing percentage of the fed cattle due to increased cost of feeder cattle and challenged profitability over the last several years. Feedlots are looking to profit from the feed sold for cattle resident in the feedlot during feeding time (hotel profit) to mitigate feeding losses. They will continue to compete for the reduced supply of feeder cattle, thus driving prices up.

US Feeder Margines Cattle Feedlots::Profits B4 Taxes/Total Assets

Packer operations

Packer operators are seeing low margins because they are over-capacity and are fighting for market share. The Cargill packing plant in Texas has closed, and the National Beef plant in Brawley, California is set to close. Cow processing/packing plants are at risk of closing with cow/calf producers culling fewer cows, thus creating a smaller available supply for slaughter.

US Packer Margines

The beef industry faces price competition from the pork and poultry industries. Supplies of pork and chicken are expected to increase in 2014 by 1.6% and 3.7% respectively. Since high beef prices squeeze retail profits, retailers may opt to feature pork and chicken over beef. Differentiation and promotion of beef products will be important in the retail setting. A longer-term risk for the beef industry comes from the loss of younger buyers. If younger buyers avoid beef and instead favor pork, chicken now due to high beef prices, they also might not purchase it in the future when the price normalizes relative to pork and poultry.

Food Price Indices

Global beef production in 2014 is expected to be steady. Tighter beef supplies will support high beef prices. Increased demand from China and Hong Kong should help support beef exports. However, additional Chinese demand for Australian beef is expected to limit U.S. shipments, and India has begun to export water buffalo meat. India now rivals Brazil as the largest exporter of beef in the global market. Most of this "beef" is canned product headed for the extremely price-sensitive East Asian markets. While this export of canned product does not directly compete with U.S. product, it certainly has changed the opportunities for competition in these key growth markets.

Choice Beef Cut Out

In summary, the various beef segments should enjoy strong profits in 2014; however profit won't necessarily come easy. Record-low cow herd levels and record-high fed cattle prices will continue to fuel competition for stocker and feeder cattle. Reduced ration costs will help support the feedlot segment. Rationalization in the packing segment should improve profit potential. Exports should continue to support record-high beef prices. Growing world populations and incomes will help drive demand for proteins.

The question is just how high can beef prices go, given the expected increases in pork and poultry supplies? The pork and poultry industries can adjust their output more quickly than the beef industry, thus tempering growth in beef prices. And, sooner than later, the disease-constrained production in the hog sector will end when an efficacious vaccine for porcine epidemic diarrhea virus (PEDV) is introduced, and this too, will have an impact on beef prices.

 

Photo of Christy SeyfertDon Colter is a Wells Fargo Agribusiness Consultant and northwest team leader based in Boise, Idaho. He is focused primarily on the dairy, feedlot and cow/calf industries and also works with a number of primary and secondary level food processing companies. Don has worked for Wells Fargo for greater than 20 years. Prior, he served in the positions of loan officer and appraiser positions for the Sacramento District Farm Credit Services, Arizona Livestock PCA, Valley National Bank of Arizona and First Interstate Bank of Arizona. Don is a graduate of the Arizona Center for Rural Leadership and has taken numerous classes from the Society of Farm Managers and Rural Appraisers.

Don grew up in the cow/calf and feedlot businesses in Arizona and Colorado. He holds a BS degree in agricultural economics from the University of Arizona and a MS degree in agribusiness from Arizona State University.

Global grain imports and exports: Ukraine and beyondBy Michael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist The recent geopolitical turmoil in Ukraine reminded the global grain markets that bad things can happen quickly. Read more

The recent geopolitical turmoil in Ukraine reminded the global grain markets that bad things can happen quickly. Many buyers and sellers had to catch up on their global grain statistics in short order to evaluate the market's reaction. Was the resulting price shock an over- or under-reaction to the possibility of the loss of Ukrainian grain exports? Ukraine has been the largest beneficiary of foreign direct investment (FDI) in agriculture due to the recent grain price increase. It perfectly illustrates the global market's potential for responding to higher prices. U.S. grain producers' dependence on global demand increases their need for margin management and working capital reserves.

In 2013, Ukraine surpassed Canada to become the second largest net exporter of grain with 31 million metric tons of exports. Ukraine trails only the U.S., which exported 71 million metric tons of grain in the same marketing year. This development clearly illustrates the fallacy of the "they are not making any more land" argument for land investment. The following graph shows Ukraine adding 55% to grain production from the early 2000s until the most recent years. It achieved this notable increase with a 16% increase in harvested acreage and a 36% yield gain on all acres. Ukraine now produces the same amount of grain on a per capita basis as the U.S. It is this surplus of grain that will become its competitive advantage in exports and livestock production. Even more telling, Ukraine still only manages half the yield per hectare (equivalent to 2.471 acres) as the U.S. This comes from its crop mix and inputs, but it will continue to improve rapidly compared to the U.S. In order to advance, domestic grain producers will need to create new technologies, while Ukraine can simply borrow existing technologies to catch up.

During the same time period, the U.S. managed an 18% production increase from a mixture of 4% more acres and a 13% yield gain. The U.S. is still the dominant global grain producer for export markets, but the international grain markets were in Ukraine's advantage. U.S. biofuels policy is about the U.S. grain industry and all its domestic politics, but it made farmland in Ukraine and elsewhere much more valuable, and allowed Foreign Direct Investment (FDI) to flow into Ukraine's economy. As always, the unintended consequences come from bad assumptions about what is a fixed factor. Ukraine had been impaired since the dissolution of the Soviet Union in the early 1990s, and most analysts assumed it would stay that way. A return to higher grain prices will only strengthen the global search for cheaper sources of grain, and countries like Ukraine offer a much better return to investment than $12,000-an-acre ground in Iowa.

Grain Production Grain Production

Between the U.S. increasing its grain usage for its domestic biofuels market and Ukraine's increasing net surplus, the world grain price has been impacted by the Former Soviet Union's (FSU's) ability to supply increasing global demand. The Middle East North Africa (MENA) market has found FSU grains a better logistical fit when delivered out of the Black Sea ports. Often when categorizing MENA, the focus goes to the two largest individual importing MENA countries of Japan and China since together they account for approximately 17% of global grain imports, although their trade is mostly focused on feed grains and wheat since they view rice as a strategic grain to be produced domestically. However, MENA represents a diverse array of countries with different import policies and domestic supply situations, and makes up the fastest growing portion of global population and demand. MENA grain demand grew by 24% over the last 10 years, mostly due to variation in diet where protein is a less important element.

The South American and Central American (SACA) region also has rapidly growing demand for grain. SACA's grain demand grew by 28% over the last ten years, slightly faster than the MENA demand growth.

Grain Consumption by Key Regions

The crucial difference between MENA and SACA comes from the fact that SACA had an even faster growth in its grain and oilseed supply over the same period. Its grain production rose by 36%, allowing it to increase exports to the global market. In contrast, since MENA remains constrained by water supplies, its grain production grew by only 4% during the last ten years. This supply and demand dynamic will only become more pronounced going forward as SACA increasingly catches up to the production leaders in terms of yield and acreage increases.

Net grain production by Key Regions

Given the distance from the U.S. and the logistics of getting grain from the Midwest grain states to the MENA region, producers like Ukraine on the Black Sea have a large cost advantage which will make it difficult for the U.S. producer to win those markets without major transportation discounts. As far as the U.S. farmer is concerned, the real price of grain is not the quote off the Chicago Mercantile Exchange (CME), but the cash price posted on the local delivery point. The two are always related, but cash basis will always reflect who else can deliver the grain to the ultimate consumer. If the United Nation's population forecasts in the below graph are even remotely correct, the last three decades which have belonged to Asia will become the African decades. Grain growers in U.S. grain states will wake up every morning checking on rainfalls in Tanzania as well as Mato Grosso.

Population Change in Millions by Region

 

Photo of Michael SwansonMichael Swanson, Ph.D., Wells Fargo's Chief Agricultural Economist, forecasts key agricultural commodities such as wheat, soybeans, corn, and cotton, along with livestock sectors such as cattle, dairy, and hogs. Additionally, he helps develop credit and risk strategies for Wells Fargo's customers, and performs macroeconomic and international analysis on agricultural production and agribusiness.

Michael joined Wells Fargo in 2000 as a senior economist. Prior, he worked for Land O' Lakes and supervised a portion of the supply chain for dairy products, including scheduling the production, warehousing, and distribution, and also supervised sales forecasting. Before Land O'Lakes, Michael worked for Cargill's Columbian subsidiary, Cargill Cafetera de Manizales S.A., with responsibility for grain imports and value-added sales to feed producers and flour millers. Michael started his career as a transportation analyst with Burlington Northern Railway.

Michael received undergraduate degrees in economics and business administration from the University of St. Thomas and both his master's and doctorate degrees in agricultural and applied economics from the University of Minnesota.

Food safety: managing risk throughout the supply chainBy James Cardoza, Wells Fargo Agribusiness Consultant Food processors employing advanced food safety technologies and food safety management plans are winning sales and increasing market share. Read more

Food processors employing advanced food safety technologies and food safety management plans are winning sales and increasing market share. In response to past food safety-related incidents, and because food safety is a big concern for many consumers, Congress passed the Food Safety Modernization Act (FSMA) in 2011. While implementation of this act may bring the portion of the industry that has not already been operating with formalized food safety management plans and procedures up to speed, much of the industry has already been carrying out many of the best practices now required by the FSMA, for several reasons:

  • Many buyers – especially high-income international buyers – are requiring food safety management plans and the highest possible food safety standards as buying prerequisites.
  • More food safety incidents can be traced back to their source by using DNA tracking and other technologies.
  • Costs to the companies directly involved in past outbreaks have been extreme up to a result of bankruptcy.

Ultimately, responsibility for maintaining food safety does not end with the farmer or food processor, but rather extends to the grocers, foodservice companies, restaurants, and the consumer when preparing food or storing and serving leftovers.

This article addresses the causes of foodborne illness, wide-spread impacts of outbreaks, the Food Safety Modernization Act (FSMA), and how both companies and consumers can manage food safety risk.

What are the top causes of foodborne illness?

According to the CDC, the top foodborne illness causing disease agents include: Salmonella, Campylobacter, Escherichia coli (E-Coli), Vibrio, Yersinia, and Listeria.

Common activities associated with food becoming infected by top disease agents include:

  • Consumption of raw or undercooked eggs, poultry, or meat
  • Consumption of raw or unpasteurized milk or other raw or unpasteurized dairy products
  • Failure to wash produce prior to consumption
  • Failure to wash hands after handling pets or after using the restroom
  • Failure to wash knifes, cooking utensils, pans, kitchen towels, washcloths, and food preparation surfaces to prevent cross contamination between raw meats and raw vegetablesi,ii

What steps do farmers, food processing, food retailers/grocers, and foodservice companies take to manage food safety risk?

To manage food safety risk and prevent foodborne illness, many companies are taking a systematic approach to risk management that involves people, planning, procedures, equipment, monitoring, and feedback. Depending on the specific food safety risk identified, some companies have:

  • Modified their plant layouts, including having separate loading docks, separate employee break rooms, and different employee uniform colors for raw products and cooked products
  • Upgraded their pasteurization and sanitation equipment
  • Added on-site labs with chemistry and microbiology testing equipment
  • Added individual product lot number labeling equipment for better tracking and tracing
  • Added other specialized equipment, such as equipment to test the integrity of the seals on ready-to-eat food packaging, and X-ray scanners and laser sorters to test for the presence of and to eliminate foreign material at various points along production lines

Hazard Analysis and Critical Control Point (HACCP)

Many food industry companies are implementing Hazard Analysis and Critical Control Point (HACCP) plans, a primary framework for food safety management methods. HACCP plans take a preventative approach to food safety and may be voluntary or government-mandated, dependent upon a company's activities. The FSMA requires implementation of preventative controls similar to the HACCP plans some companies already use. Even if a company has already implemented a HACCP plan, it may still need to make additional process changes to be fully compliant with the FSMA. According to the FDA, "preventative controls may be required at points other than the critical control points and critical limits would not be required for all preventative controls".iii

Third-party food safety audits

Many companies are also implementing third-party quality control and audit programs, such as BRC Global Standards, the Global Food Safety Initiative, or certification programs through industry organizations such as the Safe Quality Food Institute. Decisions to implement third-party audits are often made internally, and are often driven by existing and prospective food retailer, restaurant chain, and foodservice company consumers who require the audits as a contingency for earning their business.

According to a study published in 2011 by the USDA Economic Research Service, a large percentage of U.S. meat plants are taking an active approach to managing food safety via the use of food safety technologies and food safety audits.

How do small food safety incidents mushroom into big public relations and branding issues?

According to The Center for Food Integrity's 2013 Consumer Research Summary, 63% of U.S. consumers are concerned about food safety and an equal 63% are concerned about imported food safety.iv With the shock and fear factors involved with foodborne illness, and consumer concern about food safety coupled with communications technology, a single incident at a food processing company can quickly multiply into a case of negative publicity gone "viral." National redistribution of a story run on a regional media outlet is often instantaneous, thanks to common ownership of many regional television stations and newspapers, content sharing through RSS feeds, and traditional news story syndication. Many online news outlets also include links for sharing articles on social media sites such as Facebook and Twitter.

What can reduce the grower/processor impact when foodborne illness incidents occur?

In many cases, the perception of a food safety breach can be as damaging to a brand or to an entire food industry segment as an actual breach. In addition to having formalized processes in place to prevent food safety related incidents from occurring in the first place, established public relations and product recall contingency plans may help reduce the fallout when systems fail and food safety incidents occur. Immediate reaction and up-front communication of available details can temper both the media frenzy and the public panic associated with incidents.

Examples of incidents with widespread effects

In prior years, there have been foodborne illness crises in the peanut butter, spinach, soft cheese, cantaloupe, egg, and multiple other food industry sectors.v Single incidents have had far reaching health consequences for consumers, while the media attention surrounding other incidents has expanded the perceived safety threats of some incidents well beyond the actual threats.

Following the 2006 E-coli outbreak, ultimately traced back to contamination of a single 1,002-pound load of spinach from a 2.8 acre field or an area equal to about 350 feet by 350 feet.vi For perspective, in 2005, 680 million pounds of fresh spinach were consumed in the U.S. As a result of this incident, there was a short-term decline in sales of all leafy green vegetables, and a long-term shift away from spinach to other leafy green vegetables. Based on USDA simulation models, bagged spinach sales were down 63% in the three weeks following the incident compared to normal seasonally adjusted levels, down 17% in the 26 weeks following the incident, and down 10% in the 68 weeks following the incident. And sales of bulk spinach were down 32%, 2%, and 15% compared to seasonally adjusted normal levels at weeks 1, 26, and 68 respectively.vii

In 2009, a salmonella outbreak related to contaminated peanut-based products resulted in a temporary decline in industry-wide sales of peanut butter and other products containing peanut butter. The company at the center of the outbreak, which owned a 2% market share, ultimately filed bankruptcy. In this case, long-term effects on the overall peanut and peanut butter industry were limited.viii

Food Safety Modernization Act (FSMA)

In January, 2011 the FSMA was signed into law. The act represents the largest change in nationwide food safety regulation since 1938 and its primary emphasis is nationwide prevention of food safety incidents. Examples of some of the preventative actions required under the FSMA include:

  • Prevention of hazards at the farm level
  • Control of temperatures in food and animal feed processing
  • Requirements for food importers (which source 15% of the U.S. food supply) to verify the food safety activities of foreign suppliers

Other provisions of the FSMA include:

  • Mandatory FDA recall authority
  • Ability of FDA to keep suspect food from being shipped
  • Ability of the FDA to suspend registration and prevent shipments from facilities with suspended registration
  • Risk-based inspection of facilities based on likely food safety risk
    • Fees for re-inspection or recall follow-ups charged to the company being inspected or that has a recall
    • The FSMA will allow some exemptions from inspections to smaller operations as opposed to making purely risk-based exemptions

What role can consumers play in managing food safety risk?

According to the USDA's Food Safety Working Group, consumers can play a significant role in promoting food safety when preparing and serving foods at home by following four basic steps:

  1. Clean. Wash hands, utensils, and surfaces. Wash fruits and vegetables, but not meat, poultry, or eggs.
  2. Separate. Use separate cutting boards, plates, and utensils for produce and for meat, poultry, seafood, and eggs. Wash hands between handling produce and meat, poultry, seafood, and eggs.
  3. Cook. Cook foods to a temperature of 140 degrees or higher. Microwave food to 165 degrees.
  4. Chill. Refrigerate perishable foods within two hours, never thaw or marinate foods on the counter, and know when to throw leftovers out.

Although proper sanitation by meat producers and processors is one of the first steps in preventing foodborne illness in the meat industry, even the best sanitation practices may not be able to eliminate all illness-causing disease agents in raw meat products. When it comes to meat safety, one of the last steps, thoroughly cooking the meat, is often the most critical step. While the media often focuses the blame on the farmer or food processing company in food safety incidents, foodservice companies, restaurants, and end consumers can also play a significant role in preventing foodborne illness. It is important – and beneficial – to educate consumers about proper food handling via messages on food packaging, grocery store displays, and other marketing communications.

 

Photo of James CordozaJames Cardoza, Wells Fargo Agribusiness Consultant based in Fresno, CA, evaluates food processing companies, farms, and agricultural export companies within the southwest and northwest United States. James has worked within the Wells Fargo Agricultural Industries department for six years. Prior to joining Wells Fargo, James managed his family's dairy and row crop farming operations and worked as a consultant for his family's electrical connector manufacturing company in Tulare, CA.

James holds a B.S.C. degree – finance degree from Santa Clara University and a M.B.A. degree from California State University, Fresno. He also holds a California real estate broker license.

 

i CDC, "Salmonella Prevention, http://www.cdc.gov/salmonella/general/prevention.html

iiCDC, National Center for Emerging and Zoonotic Infectious Diseases, "Camppylobacter General Information", http://www.cdc.gov/nczved/divisions/dfbmd/diseases/campylobacter/

iiiFDA,"FSMA Proposed Rule for Preventative Controls for Human Food, Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventative Controls for Human Food" http://www.fda.gov/food/guidanceregulation/fsma/ucm334115.htm

ivThe Center for Food Integrity, 2013 Consumer Research Summary

vFDA, "FSMA Videos, Webinars, & Interviews",
http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm249243.htm#primer

viUSDA, Amber Waves, The Economics of Food, Farming, Natural Resources, and Rural America, "Outbreak Linked to Spinach Forces Reassessment of Food Safety Practices, June 2007,
http://webarchives.cdlib.org/sw10864b1b/http://www.ers.usda.gov/AmberWaves/June07/Features/Spinach.htm

viiUSDA, Economic Research Service, "Consumers' Response to the 2006 Foodborne Illness Outbreak Linked to Spinach, http://www.ers.usda.gov/amber-waves/2010-march/consumers%E2%80%99-response-to-the-2006-foodborne-illness-outbreak-linked-to-spinach.aspx

viiiUSDA, Economic Research Service, OCS-10a-01, "Peanut Outlook, Impacts of the 2008-09 Foodborne Illness Outbreak Linked to Salmonella in Peanuts", February 2010,
http://www.ers.usda.gov/publications/ocs-oil-crops-outlook/ocs10a-01.aspx

Achieving profitability in the California citrus industry By Chris Stambach, Wells Fargo Agribusiness Consultant Maximum size, quality, and volume are imperative for California citrus growers to make their groves profitable businesses and not just tax write-offs. Read more

Maximum size, quality, and volume are imperative for California citrus growers to make their groves profitable businesses and not just tax write-offs. However, maximizing each of these variables is not without challenge.

The U.S. citrus industry routinely has to manage adversity from Mother Nature:

  • Pestilence. Florida, Texas, and now California are dealing with the asian citrus psyllid, the vector for the deadly citrus greening aka huanglongbing (HLB) disease. Florida already has a widespread infection of HLB, which has had a significant impact on Florida's bearing acres.
  • Weather. Freezes are an ever-present threat to the citrus crop across the nation. California had about 30 days of uncharacteristically freezing temperatures this growing season beginning in early December, and drought is also going to have an impact on the California citrus crop this coming year.

The old real estate axiom of "location, location, location" is another variable that has application in citrus production. Groves in the traditional "banana belt" of Central California blessed with good ground water and soils realize an advantage over citrus groves within the colder, low lying areas that have limited water complicated by heavy clay soils with hardpan layers. Other variables in the profitability equation include variety selection, market timing, geographic diversification, selection of their packer/marketer, and crop insurance.

With all that said, growers still have some control over their day to day operations. Those who can produce large, 1st-grade fruit in high volume will continue to be successful. A quick look at a three-year average of free on board (FOB) prices, by size and grade, readily shows the pricing advantage for 1st-grade fruit:

3-Year Average FOB Price by Size and Grade
Source: Citrus Marketer

The average price differential for the past three years ranges from $0.83 a carton for the smaller size 163 navels, up to $6.08 for the larger size 72 navels. When the cost is the same to pack a 1st-grade carton of fruit as it is to pack a carton of 2nd-grade fruit, for the most part, the difference is all going back to the grower.

How can a grower improve on-tree return? Let's look at the effects of four courses of action:

  1. An increase in production
  2. An increase in fresh utilization
  3. An increase in the ratio of 1st- to 2nd-grade fruit
  4. An increase in fruit size by switching the size of packed cartons from 88s (packed with 88 per carton) to larger-sized 72s (packed with 72 per carton)

First, the navel orange yield in California has averaged 578 field cartons/acre for 10 years ending with the 2009-10 season, according to the USDA's National Agricultural Statistics Service data. A grower who produces 700 field cartons/acre can increase his on-tree returns by approximately $855/acre, a 21% increase in revenue. A really good navel grove can do better.

Second, the "average" grower's fresh use (1st- and 2nd-grade cartons) is approximately 75% of total field cartons. Those growers with larger, better quality fruit will see their packouts in the 85% range with some exceeding 90% of their fruit packed for fresh shipments in 1st-or-2nd grade cartons. At 85%, this equates to about 58 additional cartons being packed for fresh market consumption, which translates to approximately $565/per acre in on-tree returns, or a nearly 14% increase over the on-tree returns of the "average" grower.

The third scenario is an increase in the ratio of 1st-grade packed cartons to 2nd-grade packed cartons. The "average" grower has a 2.7:1 ratio, while growers with better sizes and quality can readily attain a higher 4:1 ratio. In and of itself, this only equates to about a $155/acre increase in on-tree return.

In the final scenario, I switched the percentage packed of the smaller size 88 navels with the larger size 72 navels, a 4.5% increase for size 72 1st-grade navels and a 7.0% increase for 2nd-grade size 72 fruit, but I did not change the percent packed for any of the other sizes. This only resulted in about a $36/acre increase in on-tree returns over the "average" grower for this one factor.

The good news is that these size, grade, and/or production changes don't occur in a vacuum. When a grower has a good grove and applies the right mix of inputs, the result is higher production and better quality. When all four of the above are combined together, the results show an increase of $1,775/acre on-tree return for a "good" grower over an "average" grower (nearly double), or almost a 107% increase. Bottom line, the resulting net increase in on-tree return, or $1,775, becomes profit in the grower's pocket.

Beef Cattle Ranching:Profits B4 Taxes/Total Assets

Having looked at a number of scenarios that detail how variables affect returns and profitability, it is safe to say that growers who can produce premium quality, large fruit in high volumes will remain profitable in the ever – changing world of citrus farming.

 

Photo of Chris StambachChris Stambach,Wells Fargo Agribusiness Consultant, has been with Wells Fargo for over eight years. He currently works within the Agricultural Industries Group focusing on the citrus market, and has held previous Wells Fargo roles as a commercial banking relationship manager and district manager in the Wells Fargo agribusiness real estate group. Prior to Wells Fargo, Chris spent 14 years with Sunkist Real Estate in the role of managing director and with Sunkist Growers, Inc. as a grower relations representative and supervisor for crop estimating. Before Sunkist, he served as an agricultural real estate loan representative with Travelers Insurance Company. Chris began his career in agricultural lending as a loan officer with Madera Federal Land Bank.

Chris is a graduate of the California State University, Fresno with a B.S. in agronomy and agricultural business- ag marketing.

Wells Fargo insightsWeekly Economic Podcasts and Monthly Economic Outlook. Read more

Weekly Economic Podcasts
Listen to our weekly audio podcast on the latest economic news and its potential impact on your business.

Monthly Wells Fargo Economic Outlook
Read our monthly economic commentary and view forecast tables on U.S. and international economic conditions, including projections for the financial markets.

Watch our monthly economic forecast video. This month, Wells Fargo Senior Economist, Mark Vitner, and Economist, Michael Brown discuss GDP growth for the first quarter, the slow pace of recovery for consumer confidence, job growth, and upside and downside risks.

Monthly Wells Fargo WASDE Report Perspectives
View Wells Fargo's perspective on the April USDA World Agricultural Supply and Demand Estimates (WASDE) reports for corn, soybeans and wheat.

Webinar Replay: Planting Intentions and Grain Markets
Replay Wells Fargo's recent webinar entitled "Planting Intentions and Grain Markets" moderated by Michael Swanson, Wells Fargo's Chief Agricultural Economist, and a panel of Wells Fargo agricultural consultants.

Washington update Review a brief summary of recent U.S. government legislative activity and events that have impact on the Food and Agribusiness industry. Read more

Ag Day 2014

National Agriculture Day was celebrated on March 25 in recognition and celebration of the abundance of American agriculture. A number of events were held in Washington D.C., including an event at the Capitol, where House Speaker John Boehner (R-OH) dedicated a statue of the late renowned agricultural scientist Dr. Norman Borlaug. In addition, other events took place across the country to honor farmers, ranchers and others involved in agriculture.

Farm Bill Implementation

The 2014 Farm Bill, a comprehensive piece of legislation totaling nearly 1,000 pages, was signed into law in February, but amendments to the nation's agricultural and crop insurance programs are only beginning to take effect. Public stakeholder sessions on Farm Bill implementation concluded the last week of March with a session regarding programs administered by the Farm Service Agency and Risk Management Agency.

On April 3, U.S. Department of Agriculture (USDA) Secretary Tom Vilsack testified at a hearing of the House Agriculture Committee regarding the state of rural economy. Questions arose on a variety of agricultural and farm bill issues, including the status of livestock disaster programs (sign-up began April 15). Click the following links to view the Secretary's testimony and progress report on farm bill implementation.

The Farm Bill was a topic of discussion during the House Agricultural Appropriations Subcommittee hearing the second week of April with testimony from multiple USDA agencies — Risk Management Agency (RMA), Farm Service Agency (FSA), Foreign Agricultural Service (FAS), and Natural Resources Conservation Service (NRCS). Click the following links for details and additional information about Farm Bill programs:

RMA Farm Bill Frequently Asked Questions

FSA Farm Bill Fact Sheet

Additional FSA Livestock Disaster Assistance Information and Other Resources

Budget

Even though the recently-enacted Farm Bill will cut an estimated $16 billion in agricultural spending over the next ten years, budget blueprints for fiscal year 2015 propose additional cuts in agricultural spending. These proposals also follow this winter's congressional and presidential approval of a two-year federal budget agreement and are more likely to generate ideas for agriculture's adversaries than gain traction at this time. Click here to read more about the president's budget proposal. Click here for more information about House Budget Committee Chairman Ryan's recently-passed budget.

March and April are prime months for Appropriations Committees to review the president's budget proposals and question agency leaders about government activities. Webcasts and testimony of these hearings can be found on the House Appropriations Committee website and the Senate Appropriations Committee website.

CFTC Reauthorization and Nominees

In April, the House Agriculture Committee approved a bill to reform and re-authorize the Commodity Futures Trading Commission. This bipartisan bill seeks to improve the operations of the CFTC as well as address customer protection concerns.

Click here for a summary of the House bill.

In April, the Senate Agriculture Committee approved three nominees to serve as CFTC commissioners.

Tax Reform

While comprehensive tax reform will face an uphill battle in this 2014 election year, steps toward tax policy changes have been taken in both the House and Senate. Read more about House Ways and Means Committee Chairman Dave Camp's draft proposal and Senate Finance Committee Chairman Ron Wyden's tax extenders bill.

Food Label Updates

At the end of February, the FDA proposed updates to nutrition facts on food labels.  Click here for more information, including public comment deadlines.

California Drought Hearing

The House Natural Resources Committee held a hearing regarding the California water crisis and the need for solutions on March 19 in Fresno, California. Click here for details and statements.

Forestry Hearing

The House Agriculture Committee held a hearing on Wednesday, March 26 on the impact of the Endangered Species Act and related litigation on the National Forest System management.  Click here for more details.

USDA

Pollinator Health Program:  USDA announced $3 million in funding for farmers and ranchers in the states of Michigan, Minnesota, North Dakota, South Dakota and Wisconsin in February to improve pollinator health.  Click here for more information.

American Dairy Products Institute April 27-29, 2014
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As the premier annual event for the manufactured dairy products industry, this conference offers manufacturers, marketers, suppliers, distributors, and brokers of manufactured dairy products the opportunity to network with peers and gain insight into current dairy trends and projected developments.

When: April 27-29, 2014

Where: Hyatt Regency Chicago, Chicago, IL

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Wells Fargo is a sponsor of this conference.

Global AgInvesting 2014April 27-28, 2014
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Now in its sixth year, Global AgInvesting 2014 offers a comprehensive overview of agriculture investment opportunities, risks and return profiles across all major global production regions, as well as strategies for diversified ag portfolios including regional variation, private equity, and liquid investments. Concurrent track sessions will highlight the surrounding themes of ag venture capital and agricultural technology, water opportunities, and protein plays in livestock and dairy, global fisheries and aquaculture.

When: April 27-28, 2014

Where: Waldorf Astoria, New York City, NY

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2014 Forest Landowners National ConferenceJune 3-6, 2014
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The National Conference of Private Forest Landowners brings together private forest landowners to interact, learn and exchange knowledge on issues impacting forest landowners with leaders from the private, NGO, federal and state sectors. The conference offers insightful forums, workshops and speakers addressing a broad range of forestry issues impacting today's private forest as well as focusing on issues that are on the horizon.

When: March 6-8, 2014

Where: Ritz-Carlton, New Orleans, LA

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Wells Fargo is a Platinum Sponsor of this conference.

International Floriculture ExpoJune 10-13, 2014
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International Floriculture Expo caters to the floricultural sector and it is the only event in the country that covers all the aspects of the industry and strives to bring all the professionals from different areas under a single roof.

When: June 3-6, 2014

Where: Morial Convention Center, New Orleans, LA

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