The market can be a harsh mistress. Just when cattle prices seemed poised to surpass seasonal expectations, the market absorbed a disappointing setback. Such back-and-forth price action isn’t surprising, though. The beef complex is grappling with fundamentals affecting supply vs. those comprising demand.
Market sentiment in the first half of September was predominately positive, buoyed by concern about available supply of cattle. Correspondingly, October live cattle futures surged to almost $129 by mid-month. The fed market followed suit, as spot prices broke out from the $120-$121 trading range and jumped nearly $6 over the course of two weeks. Meanwhile, it appeared it might get even better in the final quarter, as the December contract was positioned for a break to the upside with its close near $130.75.
Supply focus allowed the market to climb the wall of worry, but demand drivers began to tug on the market from there. The reversal was on, as the October contract retreated over $6 and finished the month back at the $122 level. Weekly negotiation settled back to $122-$123 as September closed for business, driven by stalled-out cutout values.
Renewed concerns around the general state of the consumer and subsequent spending also weighed on the deferred contracts. The Federal Reserve’s latest round of quantitative easing served as a reminder about slow economic growth. Cattle prices, over the long run, are ultimately dictated by final demand; as beef spending goes, so goes the market (highlighted by the similar price pattern between wholesale and live prices – Figures 1 and 2).
The coming months are shaping up to be an important period for the beef complex given this summer’s violation of the long-term uptrend and September’s sharp reversal. The primary question now becomes about general direction going forward. Can the market attain new levels next spring, or is it consolidating into an established trading range?
For now, it appears the market faces some headwinds to find a new leg up. Primarily, there’s work ahead given the slowdown in marketings in recent months coupled with surging carcass weights. At the very least, the market needs to do some sorting in the near-term and will likely be choppy in coming weeks.
Longer-term considerations also merit some coverage here. Most notably, October always marks the heart of the fall run. And this year’s action will be especially indicative of the relative appetite for replacements during the fall marketing season. As such, reports on cattle on feed in the coming months will provide critical insight into adaptive business strategies within the feedlot sector and relative rationing of available supply of feeder cattle as the year progresses.
With that said, Figure 3 provides some context. While placements in August were sharply down vs. last year, the six-month total is nearly even with the five-year average. That’s a consistent story thus far in 2012. In other words, despite tight supply and escalating feed costs, the feedyard sector remains committed to utilizing bunk capacity to the fullest extent possible. That’s not surprising; it’s consistent with business economics.
Now let’s put that in perspective of available supply. Figure 4 illustrates July 1 feeder cattle inventory, which is particularly important because it represents the U.S. pool for the production year ahead. During the late 1990s, that supply represented over three times active bunk capacity in the U.S. – enough to stock feedyards for the year and maintain a buffer for retention of replacement heifers.
Bunk capacity has since increased while the cowherd is contracting – the outcome being that supply in 2012 is less than 2.5 times capacity. That’s barely enough to provide normal turns of cattle, let alone extended grazing and/or heifer retention.
As mentioned in my July column, “…the cattle supply situation, and potential depletion, is a serious one with important consequences throughout the supply chain.” That reality will force ever-increasing business rivalry within the feeding sector.
Throw in the squeeze from increasingly volatile feed markets and worries about consumer spending, and it all spells an especially difficult operating environment. Some companies will survive (and even thrive) in the hypercompetitive pursuit to source cattle while others will fall even further behind. Therefore, rationalization is seemingly inevitable. Those same dynamics play out in the packing sector, too – margins remain very challenging with no real hope of improvement given overcapacity.
The beef sector faces further shifts and turns. Last month’s column closed with the following observation, “…this year is unlike any other – lots of factors swirling around the business.” That spells continued turbulence ahead. Risk and cost management has never been more important. As always, remain objective and stay informed.
Nevil Speer is a Western Kentucky University professor of animal science. Contact him at [email protected].