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Defense amid crashing cattle markets

“You may wind up having to sell into a down market, so think about how you can keep this a bad year rather than the last year.”

Editor’s Note—Occasionally we come across columns that we think we should share with you. Such is the case with this look at market dynamics brought about by COVID-19 by Wes Ishmael.

Carnage in the spot cattle market wrought by global COVID-19 fears went beyond gut wrenching by the middle of March.

From the January high to March 13, spot Live Cattle futures were down $32.52 (-25.4%) to $95.75. Spot Feeder Cattle were down $34.45 (-23.4%) at $113. Negotiated cash fed steer prices were about $14 per cwt less (approximately -11.3%) on a live basis. The CME Feeder Cattle Index was down $18.92 (-12.9%).

COVID-19 cases were just beginning to bloom in the U.S. as President Trump declared a national emergency. Schools, sports leagues, organizations and businesses postponed, suspended, cancelled and altered the flow of daily human interaction. There is no vaccine and no end in sight.

READ: Coronavirus observations from the airport and the ranch

For cattle producers, Jim Robb, senior economist at the Livestock Marketing Information Center, emphasizes this is a financial story, not a marketing one. Price risk management opportunities have long since left.

“You make the balance sheet work and then make the cash flow work,” Robb says. “Fundamentally, financial risk management is how you prepare. Do you have the financial wherewithal to span the Black Swan event? Can I buy the cash flow, buy the balance sheet?”

“You may wind up having to sell into a down market, so think about how you can keep this a bad year rather than the last year,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University. “If you’re highly leveraged, you’re more vulnerable, but the sooner the better to sit down with your banker to talk about what has to be covered and figure out how to roll into opportunities ahead.”

READ: Coronavirus: Human strain vs. livestock strain

Of course, that includes assessing comparative opportunities and options.

“This may be a year to think about broader opportunities,” Robb says, “Depending on forage and management, cow-calf producers have lots of options.”

As examples, Robb says maybe a producer considers weaning early and putting calves into the feedlot or weaning later and holding them over as yearlings. Finances and cash flow will dictate some decisions. Robb also stresses keeping in mind tax implications.

Peel suggests focusing on options that buy you more flexibility and/or limit things requiring immediate action. For stocker operators, as an example, he says maybe you consider buying more heifers than usual because they offer more marketing potential beyond the feeder cattle market.

RELATED: How leading grocery stores are responding to keep customers safe and shelves stocked

In the meantime, business must go on. “I don’t think you can out-wait this if you’re a producer who needs to do something,” Peel says.

“With collapsing cattle feeding margins and declining fed cattle prices, the tendency is to hold cattle longer. Historically, that has been difficult to do. I think we need to be careful about backing up cattle supply,” says Mike Sands of MBS Research.

For stockers and cattle feeders, unless cattle are extremely light, Robb says it’s likely best to put wheels under them, especially if the cattle are hedged.

“Take advantage of the basis. It gets wide in situations like this and the market is telling you to market cattle and take the basis,” Robb explains.

While no one knows the magnitude of COVID-19 or its repercussions, Sands believes we’ll overcome it. “For the most part, we need to look at COVID-19 as, in all likelihood, a temporary issue,” he says.

Moreover, Sands notes current feedlot placement patterns suggesting increased price support this fall.

“We are placing fewer feeder cattle [starting in January]. March-May placements will likely be less as well. As we head into the summer and fall, the overall fed cattle supply will likely be lower. Cattle placed in the spring and marketed in the fall will probably be good property.”

Further, according to Sands, “It looks like we’ll head into spring with good grass. I don’t doubt that cattle grazed this summer will generate a good return in the fall, particularly led by fed cattle prices.”

 

 

 

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