November 11, 2011
With a shrinking feeder cattle supply, a lower U.S. per-capita beef supply and escalating foreign demand for American cuts, cattle prices are "going to get higher," says Randy Blach, executive vice president of CattleFax.
It was the message cattle feeders and producers wanted to hear at the recent Texas Cattle Feeders Association (TCFA) convention in Amarillo. But Blach also issued a warning – "there will be some incredible volatility," requiring careful price risk management in a boom era the industry has rarely, if ever seen.
"Along with high fed-cattle prices, we're also seeing the highest breakevens ever, a lot at $1.20/lb. or above," Blach says. "If you aren't managing this risk, it won't be pretty (if the market takes a turn you don’t expect)."
TCFA represents nearly 200 Texas, Oklahoma and New Mexico member feedyards, which finish some 30% of the nation's fed cattle. They depend heavily on calves and yearlings from regional ranchers to keep their pens full. However, Blach says fallout from the worst drought in history will continue to keep pressure on feeder-cattle supplies.
On Jan. 1 this year, USDA reported a Texas beef-cow inventory of about 5 million head. After the drought and large herd liquidation, that number will drop to 4.5 million to 4.6 million the beginning of 2012, Blach says. Cow numbers should stabilize more heading into 2013.
"Nearly all the U.S. decline in cow numbers is from Texas and Oklahoma," Blach adds. However, northern states are seeing an increase in cow numbers in areas where sufficient moisture has kept pastures green.
Still, since Texas and Oklahoma have about 23% of the nation's beef cows and produce 22% of the feeder cattle and calves, feedyards should expect tight supplies and high-feeder cattle prices, he says. He projects 550-lb. calf prices to climb to $1.75-$2/lb. in 2012.
"It should be a good run for cow-calf producers – if you have the pasture," he says.
Blach says a key market indicator, per-capita net beef supply, shows a lower supply through 2013. CattleFax projects a 2012 per-capita supply of 56.3 lbs., down from 57.4 lbs. this year. It forecasts only a 53.7-lb. per-capita net beef supply for 2012.
At the same time, U.S. beef exports will likely reach 3 billion lbs. this year, up 24-25%, while imports are down 14-15%. The world population is expected to increase by 700 million people over the next 10 years, with the world population forecasted to hit 9 billion in just a few decades.
"We think exports will continue to grow," Blach says, adding that export growth has created another $210/head in added value for producers and feeders.
On the grain side, Blach says the tightening of the "corn-wheat price spread" could create additional wheat feeding. He says CattleFax is projecting the first half of 2012 corn prices in the $5.50-$6.50/bu. range.
Meanwhile, Dennis Gartman, publisher of the Gartman Letter and regular contributor to CNBC and Bloomberg Financial News, told conference attendees that world economic problems, especially in parts of Europe, will create more volatility on commodity prices.
Speaking via a SKYPE satellite feed, Gartman says he expects grain prices to increase, caused partly by the increase in middle class consumers in China, India and other countries. These people want better food sources, including more beef, pork and poultry.
"Many people are jumping from the 17th century to the 21st century, and they’re not going back," Gartman says.
Employee management, including assuring the legality of ag workers, will continue to force crop and livestock producers and feeders to use more documentation, says Shawn Twing, an Amarillo attorney specializing in labor law.
Child labor laws, on the books for years, may be more heavily enforced, he says. They include proposals to limit operation of farm equipment by children 16 years old or younger unless they are on the family farm or small farm operations.
Children 16 years old would not be covered by "hazardous occupation" regulations through the U.S. Department of Labor, Twing says.
E-Verify is an online system designed to help farmers, ranchers and feeders check the legality of workers. It isn't mandatory, but could be. It is under proposal in Congress, so feedyards and other ag operations should "be prepared for mandatory E-Verify," Twing says.
Two stalwarts of agriculture are trying to keep sound federal crop insurance plans from being slashed by proposed federal budget cuts. Addressing the TCFA crowd, U.S. Sen. Pat Roberts (R-KS), ranking member of the Senate Committee on Ag, Nutrition and Forestry, and U.S. Rep. Frank Lucas (R-OK), chairman of the House Ag Committee, contend that too many people in Washington "take farmers and ranchers for granted."
"I've been working on crop insurance and for ag research as well," Roberts says. "We have to strengthen and preserve crop insurance for all areas of agriculture. That's why we're talking about a farm loss program and a livestock disaster program. Those have to all be considered, but we have to fit it into the budget we have.
"The problem is nutrition (food stamps, etc.) is 80% of the budget. We can't seem to get the kind of cooperation we need in the Senate in cutting more than .6% (six-tenths of a percent) of the nutrition budget. We're not taking away anyone'’s benefits, but changing how we do it, streamlining it. That effort will be ongoing," Roberts says.
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