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State Of Volatility

Ag economists say the days of price volatility are here to stay but "fundamentals" will continue to buffer the bouts of bad news.

If we learned nothing else last December, we learned that bad news travels fast. When USDA confirmed a case of bovine spongiform encephalopathy (BSE) on American soil, everyone on Earth with interest in the beef industry knew of it within hours.

“That's a price we pay for living in a time of sophisticated information transfer,” says Gary Brester, Montana State University-Bozeman ag economist. “And, as information comes more easily, as consumers demand more information about the safety of their food, industries like ours will be placed in increasingly precarious positions.”

Consequently, with beef as a major component of people's diets here and abroad, Brester says price shocks due to bad news — especially with regard to food safety — will compound the volatility of the cattle industry.

“We need to realize this is a built-in part of the cattle business today,” Brester explains. “It might be a bit brutal to say this, but we're at a point in our business where if you can't manage for volatility, it's going to be hard to stay in business.”

There will always be bad news that will lead to “corrections” in the markets, he says. It's a condition ranchers and feeders will simply have to deal with.

Now, for the good news. As demonstrated this winter, the fundamentals of the cattle industry are sound enough that prices are recharging.

Price levels, generally, are still determined by the cattle supply and the strength of consumer demand for beef. And, there's little in these fundamentals today that bodes bad news for cattlemen, Dillon Feuz says. He's a University of Nebraska agricultural economist in Scottsbluff.

The available supply of feeder cattle outside of feedlots in January 2004 was 7% less than the previous five years. In the first quarter of 2004, commercial cattle slaughter was down 8.4%, dressed weights of cattle were down 0.3% and commercial beef production was down 8.7%.

“The fundamentals suggest prices for feeder cattle, fed cattle and beef should be about 15% higher from this reduction in supply, assuming everything else was unchanged,” Feuz adds.

However, almost everything has changed in first quarter 2004 compared to the five years previous. Trade has changed most dramatically (see page 28).

Outside of a catastrophe — whether domestic of foreign — consumer demand trends change slowly. It took more than 20 years to reverse the decline in beef demand.

“We now have five years of improving beef demand,” Feuz says. “I expect beef demand to remain strong for at least the remainder of 2004.”

The 32.9 million-head, beef-cow herd can't change very fast, either. Even with heifer retention and less cow slaughter, it will be two years before the resulting increases in fed cattle and beef production show up, Feuz adds.

Shifting Cow Demographics

But, when the cattle cycle finally begins to make its inevitable upward swing, Jim Robb says cattlemen might see some geographical shifts.

“We can expect that expansion in cow numbers will be felt more in the Southern Plains and Southeast,” says the director of the Denver-based Livestock Marketing Information Center. And, it will come at the expense of the North and West — especially those areas that continue to deal with periodic drought.

Depending on how the Canadian cattle feeding sector comes out of its own BSE escapade, Robb says cattlemen in states like Montana might find better feeder markets north of the border.

Robb says corn prices over the next 10 years will add more volatility. He reminds ranchers of the old tenet of corn/cattle economics: Everything else being equal, every 10¢/bu. year to year increase in corn will decrease the 500- to 600-lb. calf price by $1/cwt.

Those rising corn prices will place more value on forages, Robb says.

“Ranchers able to hold calves longer on forages may be in a better position than those who rely on getting calves into a feedyard,” he explains. “Hay and forage bases will help buffer some of the price volatility caused by competition for corn.”

The worst case for ranchers will be high corn price and drought, something Robb says the U.S. hasn't seen on a widespread basis until recently. “But, with higher corn prices, Mother Nature will start to play a bigger role in price volatility,” he adds.

Dillon's View

Domestic cattle supplies will remain tight through 2004. Strong demand and relatively tight supplies means relatively high calf, yearling and fed cattle prices. The University of Nebraska's Dillon Feuz also expects that fed cattle in Nebraska will decline to summer lows in the mid $70s then strengthen into the fourth quarter to the upper $70s and low $80s. When export markets are restored, add $10.

He expects fall calf prices in Nebraska to be $100-105 for 550-lb. steers, while yearlings (750-lb.steers) will bring $93-96.

“Cut this out and save it,” he says. “I will either be a genius or a fool come fall.”