Fear and faltering cattle prices

Fear and faltering cattle prices

“The beef industry’s transition to larger beef supplies in 2016 has been challenging,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in early October market comments. “A persistently bearish psychology and ridiculous volatility in live and feeder cattle futures has contributed to a meltdown in cash markets and a mood among producers that is best described as fear. As a result, some producers [and lenders] seem unable to do much of anything at this time.”

At the producer level, the typical fall run of spring-born calves heading to market was slow to develop, as sellers took a wait-and-see approach while pondering their options.

Never minding the market-breaking backlog of overfinished cattle last fall, the incomprehensible nature of futures markets, or the quicker and steeper price decline than many anticipated, there may be a more basic reason markets appear so negative.

“There seems to be a fear that there is no bottom to markets once the cow herd expands and beef production starts to rise. There seems to be a feeling that any data with a positive year-over-year change [herd inventory, cattle slaughter, beef production, feedlot placements, etc.] is cause for rampant bearishness,” Peel says.

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“Perhaps the fact that the industry has not experienced a cyclical expansion since the early 1990s is part of the problem. Some younger producers and traders have never participated in herd expansion, and no one in the industry has in more than 20 years.”

Reasons for prolonged herd liquidation are the same shocks that make the notion of “normal” so distant. Shocks like: the commodity price bubble, exacerbated by subsidized ethanol; artificial economic underpinning that unleashed the Great Recession; and historic drought that led to historically few cattle numbers and historically high prices.

Now, before it seems to have begun, evidence such as increasing heifer and beef cow slaughter points to slowing herd expansion — perhaps a stuttering end to it.

“Added to the expansion in 2014 and 2015, the Jan. 1, 2017, beef cow herd inventory is likely to be near 31 million head,” Peel says. “This puts the beef cow herd inventory back to the level at the beginning of 2011, before drought liquidation dropped the herd by an unplanned 2 million head.”

Although the expansion since 2014 is properly characterized as cyclical expansion, it can also be thought of as drought recovery so far, Peel explains. “There is little doubt that the herd was poised to expand in 2011 in the absence of drought, so it hardly seems likely that expansion to get back to that level can be thought of as drastically overshooting the mark.”

That’s in line with the Baseline Update for U.S. Agricultural Markets, released in August by the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri.

The FAPRI baseline projects 30.8 million beef cows on Jan. 1. But those projections suggest further limited expansion of 500,000 head more by 2019.

The same baseline pegs the average fed steer price at $119.23 per cwt next year, trailing off to $110.90 in 2020. Feeder steer price (600 to 650 pounds, Oklahoma City) is forecast at $150.53 next year, declining to a low of $134.94 in 2020.

In the meantime, when using futures to forecast feeder cattle prices, keep in mind that basis widens starting with the November feeder cattle contract, as weight parameters are 50 pounds heavier.

“The supply challenges going forward mean that caution on the part of producers and lenders is advised and warranted,” Peel says. “However, the growth in cattle inventories and beef production thus far do not constitute a wreck, and paralyzing fear that cripples decision-making may prevent producers from taking advantage of opportunities that inevitably exist in changing market conditions.”

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TAGS: Marketing Beef
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