March 19, 2020
Editor's note: Jim Robb, senior economist at the Livestock Marketing Information Center (LMIC) sent an update.
LMIC lowered its cattle price forecasts March 19, based on the fact that the U.S. in now in a recession.
“In the second quarter of 2020, the year-over-year drop in GDP is likely to be one of the largest ever. Recent Live Cattle futures prices already incorporate that macroeconomic assessment,” Robb explained. “The recession could be moderate, but we expect it to continue during the third quarter of 2020. The public health aspect is still the big unknown and how that spills back throughout the U.S. and world economies.”
Market reaction to COVID-19 was already one for the record books as futures and equities continued searching for a market bottom and worst-case scenario March 13, when President Trump declared a national emergency.
“I don’t know anything I’ve experienced that comes close to this,” says Mike Sands of MBS Research, a veteran cattle and agricultural analyst.
“This is uncharted territory. I don’t know that there is any precedent relative to agricultural markets or the U.S. economy,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. “This is different than the Black Swan events we commonly think about.”
Depending on your definition, Black Swans affecting cattle markets include last summer’s packinghouse fire, the 2008 financial crisis, BSE in 2003, terrorist attacks on the U.S. in 2011 and the Dairy Herd Buyout in the 1980s.
“We’re at that point where we don’t know what we don’t know about this,” cautions Stephen Koontz, agricultural economist at Colorado State University. “We need to be careful in talking about what we don’t know. Let’s fall back on science and objective information.”
COVID-19 continues spread
Coronavirus Disease 2019 (COVID-19) is caused by a novel coronavirus called SARS-CoV-2. Currently, there is no vaccine to protect against it, although researchers around the world are reportedly working furiously to develop one.
“This is the first pandemic known to be caused by the emergence of a new coronavirus,” according to the Centers for Disease Control and Prevention (CDC). “In the past century, there have been four pandemics caused by the emergence of novel influenza viruses.”
As of March 18, there were 191,127 confirmed cases in 176 countries, areas or territories, according to the World Health Organization (WHO). There were 7,807 deaths.
Upon declaring COVID-19 a global pandemic March 12, Tedros Adhanom Ghebreyesus, WHO director general, noted more than 90% of the cases were in four countries. The epidemic was declining significantly in two of those—South Korea and China, the epicenter of the pandemic.
By March 18, there were 7,038 confirmed cases in the U.S.—50 states, District of Columbia, Puerto Rico, Guam, and US Virgin Islands—according to CDC. There were 97 deaths.
No one knows yet whether COVID-19 will eventually fade away, like Severe Acute Respiratory Syndrome (SARS)—caused by another coronavirus—after 2002-04, or if it will become a perennial challenge like the traditional flu. SARS infected 8,098 people and caused 774 deaths, according to WHO.
Domestic and global economies were slowing
COVID-19 provided the match and extra fuel for the panic that flattened futures and equities markets in February and March, but global and domestic economic growth was already slowing.
Domestically, U.S. stock markets climbed at a historic pace last year, but Koontz notes business investment weakened when it became clear that issues underlying the trade wars would continue to linger. As well, he says government spending stimulus was waning, while economic growth from tax cuts appeared focused in subsectors rather than the economy as a whole.
“Under any scenario, global growth in 2020 will drop below last year's level which was 2.9%,” according to the International Monetary Fund in March.
All of that is to say that the risk of domestic and global economic recession continues to increase.
“Live Cattle futures are pricing in a recession by this summer,” explains Jim Robb, senior economist at the Livestock Marketing Information Center (LMIC).
LMIC sees a 75% chance of U.S. recession by the first quarter of next year. That was before central banks in the U.S. and around the world began taking aggressive action to counter COVID-19 economic impacts.
If there is domestic recession, Robb expects it to be moderate, nothing as severe as the once precipitated by the financial crisis in 2008. Plus, he points out the U.S. economy would enter a recession in much stronger position than the last one with high employment, wage growth and elevated consumer confidence.
Even so, Robb says, “We’ve got a pile of pork and chicken, which doesn’t bode well for beef in a slowing economy.” He explains beef and lamb typically face more demand pressure than pork and poultry during tougher economic times.
Supply and demand
USDA’s Economic Research Service forecasts beef production this year to be record large at 27.7 billion pounds. Total red meat and poultry production is also expected to be record large at 109.4 billion pounds.
Koontz explains substantial U.S. beef exports were already needed to reduce supply-side pressure and maintain year-over-year beef prices. Logic suggests fallout from COVID-19 will at least delay the increased exports expected following resolution to a number of trade deals.
“It’s not apparent to me that there has been much destruction in beef demand,” Sands says of the domestic situation. “Cattle prices have been impacted more significantly than beef prices.”
There is little doubt that food service demand will suffer as more consumers likely eat at home more often, according to Sands. But, he expects retail demand to remain aggressive.
“The June and August Live Cattle Contracts are below $95 (mid-March), suggesting an early-summer blended cutout value of around $170. That looks unreasonably bearish to me. My inclination is that the markets have overly discounted on perceived demand destruction,” Sands says.
Glynn Tonsor, agricultural economist at Kansas State University, notes U.S. beef exports have the potential to benefit from expanded Chinese import demand as that nation recovers from COVID-19.
This isn’t the 1980s again
“For cattle markets, price pressure will persist through April and into May,” Koontz believes. “Normal seasonal spring rallies may be delayed and will require some aggressive retail featuring as was observed in the last half of 2019, and then it will take consumers willing to buy the highest priced protein.”
That’s an unwelcome thought for cattle producers. Calf prices were nothing to brag about the last couple of years, but Robb points out cull cow prices were south of horrendous. LMIC estimated average cow-calf returns in 2019 to be the worst in 23 years.
Throw in the August Tyson plant fire, last year’s catastrophic flooding, along with COVID-19, and it’s likely some producers face economic challenges.
“Producers who have the weakest equity position and/or constrained cash/operating funds are the ones at most risk,” Tonsor says. “That description likely fits a proportion of producers throughout the industry, from seedstock to feedlot.”
“We’ll need to be on the defensive, probably for the rest of the year,” Peel says. “Stress levels will get higher. I think the psychological part of this is important to consider individually and as an industry.”
Despite current price and financial pressure, Robb emphasizes current times are not a repeat of the 1980s-90s. He explains producer financials, on average, are far from the precarious position of those years, when nosebleed leverage, debt and interest rates ruled the day, spawning significant producer attrition.
Plus, Robb says U.S. economic strength softens the current blow, as does the fact there are more off-farm employment opportunities available to producers who want or need to supplement income.
“I encourage those with feeder cattle price risk exposure to use the K-State Feeder Cattle Risk Management Tool [agmanager.info/k-state-feeder-cattle-risk-management-tool] to assess projected net selling prices of using futures, options, or Livestock Risk Protection products to protect their output price risk,” Tonsor says. “At different times, the benefit-cost relationship favors implementing one of these strategies and at other times does not. One can only assess this for their specific situation if they regularly monitor and make corresponding managerial decisions.”
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