Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
April 13, 2001

FMD Market Risks

The European outbreak of foot-and-mouth disease (FMD) raises serious concerns that an outbreak in the United States could produce dramatic market reactions.

Livestock markets are very sensitive to which countries have FMD. U.S. beef and pork exports have experienced rapid growth in recent years, setting new records each year. These exports have contributed to the strong meat demand and positive price outlook for the coming year. FMD in other countries potentially opens up additional export opportunities as long as the U.S. remains disease free. However, a U.S. FMD outbreak would immediately shut off these exports. In addition, while there is no human health risk with FMD, the perception of health concerns would likely negatively affect demand. The result could be sharp price declines, interruption of livestock movement and a devastating economic impact on the livestock industry.

Consideration should be given to strategies to reduce market risk. Government funds available to compensate the producer for 100 percent of market value provide some protection to producers directly affected by the disease. But the programs don't provide any market price protection for other producers, regardless of the health of their animals. Cash contracts might offer some protection, by locking in an agreed price and delivery terms. However, delivery problems might occur if a producer is unable to deliver because they (or whoever was to receive the livestock) ended up in quarantined area. Futures or options strategies would offer price protection, without the delivery risks of cash contracts. However, the effectiveness of the futures market strategies depends up on matching contract size to production and the liquidity of the appropriate contracts.

The grain markets have already experienced some of the negative impacts of FMD. Large production and increasing carry over supplies have led to low grain prices. The only bright spot in grain fundamentals has been strong demand. Anything that might reduce feed demand, such as FMD, has the potential to increase carry over supply and cause market volatility--making low grain prices even lower. On March 30, corn prices opened strong and moved higher based on reduced planting intentions. Then, news of testing North Carolina hogs for a FMD like disease sent prices sharply lower at mid-day. May corn futures prices ranged more than eleven cents for the day and closed four cents lower! Soybean prices also reacted negatively to the news.

The market loan and LDP offer some new crop price protection. Using cash market contracts, futures hedges or buying put options would offer additional protection for new crop corn prices that are above loan prices. Remaining old crop supplies are also at risk, especially if the LDP has already been claimed. Selling old crop cash grain and re-owning on paper continues to look like the better strategy stored grain.

The threat of FMD adds marketing risk for both livestock and crop producers. While no marketing strategy is perfect for this situation, there are marketing tools that could help manage FMD associated risks. To be effective, they should be in place before an outbreak occurs. --Melvin


University of Missouri ExtensionDecisive Marketing - April 13, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010413.html -- Revised: April 20, 2004
breesm@missouri.edu