It's hard to believe, but Hurricane Katrina will likely be favorable to near-term cattle prices, if it impacts them at all on a net basis.
“Short-term, we can't find any evidence of disruption to the cattle market,” says Mike Miller, Cattle-Fax director of research and development.
“This doesn't change the inherent demand for cattle enough that we can detect it in the market,” agrees Derrell Peel, Oklahoma State University Extension livestock economist.
Negative market psychology and fuel-price concerns took a bite out of cash and future markets the week after Katrina roared ashore in the central Gulf, but they rebounded within a week of trading.
Certainly, there was extensive agricultural damage. An early American Farm Bureau estimate pegged losses at $2 billion. By mid September, it appeared the largest losses came in the region's dairy and poultry industries. Sugar cane, rice and cotton production were also affected.
If anything though, grain prices will decline further, depending on how quickly export service is restored to the lower Mississippi River and the Port of New Orleans — from which 60% of U.S. corn and soybean exports originate. Within a week of the disaster though, USDA said operational capacity of the grain elevators and floating rigs for loading grain from river barges to ships was back to 63% capacity.
Moreover, many private analysts were predicting the soybean and corn crops would beat USDA's already-buoyant forecasts, which could further depress prices of those commodities.
Meanwhile, Peel says poultry prices may climb due to broiler-industry losses. As an example, Tyson Foods early on stimated damages of $10-$20 million, which included live-bird losses, temporary processing closures in Mississippi, and frozen-product spoilage in Louisiana and Mississippi.
These potential benefits to cattle prices hold true despite the direct impact rising fuel prices can have on markets this fall. In fact, Miller says the cost of freight has increased a third during the past 18 months. Not long ago, folks could get all the cattle hauled they wanted from the Southeast to the Central Plains for $2.50/loaded mile. Now, there are reports it's taking $3.
Miller says a 50¢-75¢ increase in the cost of freight per loaded mile reduces feeder-cattle prices $3-$5/cwt. That's not including the erosion in basis for cattle producers in that region.
Still, despite the human tragedy, Katrina does nothing to change the current supply fundamentals that have cushioned the cattle market from the severe market shocks of the past 22 months.
Demand, a long-term casualty?
What Katrina does change, and may accelerate, is the ability of beef demand to withstand such market shocks.
“Can we shrug off another one?” Peel wonders. “I think demand is capped pretty effectively with high energy prices, plentiful meat supplies and the ongoing closure of export markets.”
Moreover, demand could easily weaken as the impact of Hurricane Katrina begins catching up with the piggy banks of consumers nationwide. First, rising energy prices will pressure consumer buying decisions. But prices also likely will rise for other consumer goods related to hurricane recovery and reconstruction.
Everything from construction supplies and services, to costs for insurance and business travel, will likely rise in Katrina's wake. That's in addition to money the nation and communities are spending on the tragedy, funds that either take away from other programs and services, or have to be recouped from the public in some way.
None of this is to say the market is due to unravel anytime soon. Again, the supply side masks a lot of problems. It's a wake-up call, though. The inevitable cyclical, sector-wide, downturn in the market could quickly pick up steam if demand weakens significantly.
“The Canadian situation with BSE really bought us 18 months of invulnerability to market shocks, and we've spent most of it…The feeder markets have been oblivious to the realities of those for fed cattle and meat,” Peel says.
He points out seven-weight steers the first of September were $31/cwt. higher than the January and February fed-cattle contracts they would be hedged against if the incongruous economics made hedging possible.
“We've been really bulletproof up to now, but there will come a day of reckoning,” Peel says. “I do think the industry has achieved a new and higher price plane, but you can't get around the fundamental reality that sooner or later the feeder and fed cattle markets have to start running together again.”