May 4, 2020
“Until the country has a better handle on the pandemic, it’s going to be very difficult to feel confident in a market bottom,” said Katelyn McCullock, senior economist and director of the Livestock Marketing Information Center (LMIC).
As of the second week of April, much of the U.S. economy had been effectively locked down for going on four weeks. COVID-19 infections and deaths due to the disease appeared to be peaking in the U.S. and several other countries, but there was still no definitive end in sight.
In fact, odds were about as favorable for shooting the belt loop off a faded scarecrow from 100 yards, in a dust storm, with an anvil for a pistol, as they were to accurately predict the end to the pandemic and subsequent economic recovery.
Cash price volatility
All the while, cash cattle prices ping-ponged across wide ranges, significantly lower than before the crisis began.
Steers weighing 600 pounds in the North Central part of the country (as defined by the USDA) declined $6.65 per cwt from the middle of February to March 13, when President Donald Trump declared a national emergency related to COVID-19.
From then until April 9, those steers traded across a $12.48 range. That’s according to the National Weekly Feeder and Stocker Cattle Summary from USDA’s Livestock, Poultry and Grain Market News.
The month-to-month decline was $9.33 in the South Central region (steers weighing 500 to 600 pounds) and then a trading range of $15.05. The decline in the Southeast was $5.20 (steers weighing 400 to 500 pounds) with a trading range of $14.08 from mid-March to April 9 (Figure 1).
“Calf prices tend to peak in March and April. They tend to bottom out in the September-October time frame, when everybody starts bringing calves to town. If we had 550-pound calves to sell, many of us just stopped,” said Stan Bevers during a weekly COVID-19 market update hosted by the Texas and Southwestern Cattle Raisers Association (TSCRA).
Bevers ranches with his family and owns Ranch KPI LLC, a ranch consulting firm. He is also professor emeritus and Extension economist with Texas A&M University and has a current appointment with the King Ranch Institute for Ranch Management.
Across the same time period, Five Area weekly negotiated cash fed steer prices ranged from $105 to $119.71 per cwt on a live basis, and $168 to $190.27 in the beef.
Cattle futures were even more volatile (Figure 2).
“I think you see the market pricing in one main thing. It’s concerned about a packing plant or two being shut down, and limited beef supplies because of that,” explained Stephen Koontz, agricultural economist at Colorado State University, during an April 8 NCBA Beltway Beef podcast.
“When you get into a situation where it looks like you might have some supply chain disruptions, you have some very aggressive selling and aggressive risk coverage going on,” he said.
Since the pandemic began, folks in the cattle and beef businesses knew prices were vulnerable to COVID-19 pressuring already constrained beef packing capacity.
Initial signs of such pressure were just coming to light, as infections in the workforce were confirmed at packing facilities across all species.
Of course, extreme market pressure, price volatility and supply chain disruptions due to COVID-19 were affecting almost every market.
“Let’s not have tunnel vision and focus just on the markets we’re most concerned about. What’s going on in cattle markets is by no means unique. We’re seeing lots of assets aggressively sold. It’s almost across the board. You have to look pretty hard to find a market that has some strength,” Koontz explained.
Calf prices can rebound
The three-year price average for 550-pound steer calves in Texas from early to mid-March was just over $170, according to Bevers. This year, it reached about $158.
“I’d hate to believe $158 is going to be the high price of the year, because that means that by the time you get to September-October, they will be in the $120s to $130s,” Bevers said. Fall Feeder Cattle futures were $129 at the time.
Despite current market pressure and the plethora of unknowns, the first week of April, LMIC still expected cow-calf returns this year to improve slightly, compared to last year’s anemic ones. LMIC said prices would be helped along by higher cull cow prices as well as slightly higher fourth-quarter calf prices.
Specifically, LMIC is projecting the fourth-quarter average steer calf price in the Southern Plains (500 to 600 pounds) to be 2% to 6% higher than last year’s price of $158 per cwt. LMIC analysts are forecasting the annual average feeder calf price to be $3 to $5 less than the previous year’s $163.40.
Among the assumptions in those prices is the U.S. entering a deep recession in the second quarter, with a double-digit decline in gross domestic product (GDP), negative GDP in the third quarter and possible improvement in the fourth quarter — then emerging from recession in the first half of 2021.
McCullock emphasized LMIC is updating its price forecasts weekly, as the COVID-19 situation evolves.
Keep in mind that current market positives include the end of cyclical cow herd expansion, and increased U.S. year-over year beef exports to key Asian markets that were already grappling with COVID-19.
On the other side of the equation, U.S. beef production is projected to be record-large, as is total red meat and poultry production.
Know your numbers
Wherever prices end up, Bevers advised producers to know their number — the potential shortfall in net ranch income.
During TSCRA presentations, Bevers shared data from a case study ranch, based on his consulting work. It’s a fairly typical West Texas ranch: spring-calving cows; backgrounding calves and then marketing them before the end of the calendar year; and selling cull cows and bulls in the fall.
Price projections for annual budgeting at the end of last year are drastically different from what he now anticipates.
Keeping in mind there are seven months left in the year, money was already spent on the winter feed program and producers likely already bought bulls, Bevers asked, “What can you do today if you believe your net income is going to be reduced this fall?
“I wouldn’t look at things that impact my productivity. I’d look at capital purchase assets” — things like originally planned building and improvement, vehicle and machinery purchases.
“Right now, an option is also retaining calves — if you pencil the numbers and it works. You’d hope by the first quarter of next year, we’d be back to normal,” Bevers said.
Moreover, while prices are obviously important, Bevers pointed out increasing total costs by 10% or having a 10% decline in herd pregnancy rate has more impact on the ranch bottom line than receiving 10% lower calf prices.
Time and timing matter
How COVID-19 unfolds from here, and how fast, will have plenty to say about how quickly the overall economy can recover.
“Best-case scenario, as soon as we have some confidence in control of the virus, the economy pops back. We weather the sharp downturn and rebound fairly quickly,” McCullock said.
“Worst case, the economy remains closed for several quarters. Instead of a V-shaped recession, you get a long, U-shaped one with high levels of unemployment for a long period of time, massive job losses and closed businesses — which could lead to significant substitution away from beef by consumers,” she said.
“It could be anything from a quick recovery to a rather laborious one, and we just don’t know yet,” Koontz explained. However, without a vaccine and with the potential for a secondary COVID-19 outbreak in the summer, he believes a slow recovery is more likely than a quick one.
Koontz added that economic stimulus from the federal government and the resulting added liquidity will help markets to recover and the economy to normalize.
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