“To me, one of the big factors in terms of upside potential of the cattle market is how high we can push beef purchases. I don’t know the answer, but if we want profits in the cattle business, as we have had over periods of time during the last 12-18 months, the limitation will be how high we can push beef.”
With that, Mike Sands with Informa Economics laid out a major challenge that cattle feeders will confront over the next year or two. To illustrate his point, Sands says there have been some significant imbalances between cattle and beef prices over the past 1½ years – particularly from last fall and through the first eight months of this year, a period that featured packer margins in the red.
“Part of what the higher cattle prices were able to achieve was a willingness of the packer to run in the red,” he says. “That’s not sustainable; it’s no more sustainable than the kind of craziness we’re looking at in the cattle feeding business today.”
In his opinion, part of that situation stirs up some real questions about consumer demand and export growth. “We look back over the last couple of years and the argument is that meat demand has been really good. And we had good exports last year. But beef prices weren’t high enough to generate a profit for the entire industry. That probably isn’t going to change,” he says.
BEEF Video: Dan Halstrom On Beef Export Potential
Retail beef prices have risen almost every month for the last several years, Sands points out. He’s concerned about how far consumers can be pushed. He thinks fed cattle have a chance to approach $140/cwt. next spring. “If we go to $140 and give the packer a breakeven margin, we need to have the blend cutout at $225 to $230. We haven’t had it consistently above $190 yet, so I’m a little bit concerned from a domestic standpoint.”
Obviously, the octane boost underneath higher cattle prices has been a smaller cowherd and a resulting shortage in feeder cattle. “We’re talking about a 6-million-head drop in inventory going back to 2008,” he says. “Half of that was in the beef cowherd.”
And it’s not over. Sands wouldn’t be surprised to see a cowherd with 800,000 fewer cows come January. “And I don’t necessarily think that’s the end. On Jan. 1, 2014, I wouldn’t be at all surprised to see a further drop.”
A Closer Look: No Relief In Sight For Market Volatility
Sands says everyone agrees that price levels will go higher as the industry shrinks, and the volatility that cattle feeders have seen in fed cattle prices will likely continue. In each of the last two years, there’s been a swing of as much as $20 in fed cattle prices, and he expects that volatility to remain. “As a result of that, not only are we raising overall price levels, but we’re increasing the cost of financing the increased equity values.” The end result, he says, is higher financial risk.
“That’s got to be part of your game plan over the next 2-3 years, even though we all believe that numbers will tighten and price levels will go up. The financial risk involved in this business probably won’t come down, so keep that in mind as you put together your game plans over the next 2-3 years,” Sands says.