Last month's “Market Advisor” column focused on the immediate market price impact of North America's second case of bovine spongiform encephalpathy (BSE) and the projected profit implications for ranchers' 2004 calves. With most export markets still closed to U.S. beef exports, the economic challenge for the industry has shifted to the price impact of domestically consuming the 10% more beef that typically would be exported.
Fortunately, the U.S. should be able to eat its way out of this export problem. The key economic question is at what price? Canada, which exported 65% of its production, had no hope of eating its way out of the problem and its cattle prices collapsed. While that shouldn't happen to U.S. cattle prices, just what can U.S. ranchers expect as the BSE saga continues?
This is new territory. No Extension specialist or rancher has ever had to deal with such a situation. Theory suggests, however, that such a large market shock normally causes an immediate market over-reaction on the downward side. In fact, that was the 16-20% market drop analyzed in last month's column.
Following that drop, the market is typically expected to overreact to the upside but to a lesser magnitude. The market then typically oscillates up and down before finding an equilibrium price level.
Once the industry finds this new level, we can expect the market to progress through 2004, 2005, and even into 2006, reacting to BSE-induced changes in the beef supply and demand.
Clearly, the post-BSE era isn't marketing as usual. Ranchers not only need to get a handle on where prices are, but where prices are going. Attending a local sale is a good way to determine where prices are today. Week-to-week comparisons of local sale barn prices can keep a rancher adequately informed on where prices have been and where they are today.
But, today's sale barn prices are just that — today's prices. If a rancher wants to market later in 2004, how does he determine a set of planning prices for those marketings? My next several columns will be designed to help ranchers implement a post-BSE, market-price tracking system.
A Tracking Foundation
If ranchers implement my proposed market tracking system, they should gain a personal understanding of where cattle prices are headed during this BSE aftermath through 2004, 2005 and probably into 2006. Let's use this foundation to begin tracking slaughter cattle prices.
The foundation of my rancher-based, market-price tracking system is the U.S. futures market. First, let's use futures market prices to illustrate how the U.S. cattle markets reacted to the BSE announcement in Washington state.
I will use futures prices for Dec. 12, 2003, to represent where U.S. slaughter cattle prices were before the Washington BSE announcement. The monthly live cattle futures prices available on Dec. 12, 2003, are charted in Figure 1, and clearly point out that the futures market was projecting a dramatic decline in slaughter cattle priced during the first half of 2004 — even before the BSE announcement. This a key point that ranchers need to absorb — cattle prices were already headed downward.
The red line in Figure 1 shows the Dec. 12, 2003, projected seasonal pattern for slaughter (live) cattle for all of 2004. This is a fairly typical seasonal price pattern for any given year.
In general, prices are strong in the spring, weak during the summer, and strengthen into the fall. The yellow line represents the average Dec. 12, 2003, futures price for the reported eight monthly prices for 2004. As the yellow, broken line indicates, the annual average is $80/cwt.
Tracking Slaughter Prices
Figure 2 shows the slaughter (live) cattle futures prices for Dec. 31, 2003, the first week after the BSE announcement. Again, the red line illustrates the projected seasonal pattern and the yellow line represents the $72 monthly average. Note that the seasonal market price pattern changed little after the BSE discovery.
By Dec. 31, the average price for the year dropped $8 from the Dec. 12 average. This $8 drop in the average futures price suggests the market initially over-reacted to the BSE announcement.
When I drew this same chart for Jan. 7, 2004, the average line increased $2. Drawn for Jan. 9, the average line increased another $1. When I drew this chart for Jan. 16, the average increased another $1. By Jan. 23, this average line increased to $76.
Jan. 30 generated a 70¢ drop in the average line while Feb. 3 generated a 40¢ increase. By Feb. 6, the average had risen another 25¢. By Feb. 10, the average grew another 25¢ for a Feb. 10, yearly average of $74-plus.
These decreasing, up-and-down oscillations suggest the market was approaching an equilibrium around $74 average for the year — down $6 from the Dec. 12 pre-BSE level.
Figure 3 presents the live-cattle futures markets as this was being written (Feb. 23). Again, the red line projects a slightly dampened seasonal price pattern. Values for individual months are changing and it's worthwhile to note the change.
March and April prices strengthened about $1/cwt. and the summer months have strengthened $3/cwt. The fall months are still around previous levels. The yellow, broken line illustrates the average futures price for the year at $74.60 — up 25¢ from the Feb. 10, 2003, average.
By the time you read this, the futures markets will have changed, hopefully, upward. As we progress through each week of 2004, producers should check each Wednesday's live-cattle futures price from a local newspaper or the Internet and note the current projected seasonal price pattern.
Second, calculate an average price for the next 12 months. Compare your newly calculated average price to the previous week's average price. If you can explain the difference, return to your normal work with your beef cows. If you can't explain the difference, contact your state livestock-marketing specialist (or e-mail me) to learn why the markets are behaving differently than you expected.
Continue visiting your local sale barn as always. If you'll add my proposed 20-minute weekly Future watching exercise, you should gain a better understanding of market planning prices in the post-BSE era and you should become a better marketer.
My next column will look at post-BSE feeder cattle planning prices.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].