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Cattle Supply, Depletion, Becoming Serious Concerns

Cattle Supply, Depletion, Becoming Serious Concerns
It’s seems to be a never-ending theme these days - lots of uncertainty and turbulence are lurking around the markets.    Get more tips to market & manage cattle during this volatile time here.

June’s market action was fast and furious. That derives from lots of unknowns across a number of fronts including the global economy, fiscal policy and weather. The culmination makes traders uneasy and quick to respond to any news that might prove important. We’re working with headline-driven markets and that’s likely to continue in the coming months as we navigate through the push and pull of various market drivers.

Last month’s column began with discussion around the consumer and the general economy including observations regarding the University of Michigan’s Consumer Sentiment Index. Recall that May’s reading was somewhat surprising: 79.3 – the best reading since October 2007. However, that optimism was short-lived. June’s final reading was a disappointing 73.2 – the poorest showing for 2012 and about flat with last year’s mark.

What’s especially notable, though, were observations about the shift included in June’s press release: “…the entire June decline was among households with incomes above $75,000. Higher income households were not only less optimistic about economic prospects but viewed their own financial prospects much less favorably.” That’s further underscored by noting that higher-income households, “…wanted to adopt more cautious spending plans now to protect their finances from potentially adverse developments.” That’s important when considering that 50% of consumption, or roughly 35% of the country’s total GDP, comes from the top 20% of income distribution.

In other words, the consumer, even at the upper end, appears to be somewhat stalled out, hampered by concerns surrounding monetary policy both domestically and internationally. That’s particularly significant considering current retail prices in comparison to pork and poultry. Without better spending, there are fewer total dollars available to come into any industry, beef included.

 All that said, the Choice cutout has bumped up against resistance at $200 several times during the past seven months. However, in context of the discussion above, careful consumer spending is likely preventing a breakthrough to new levels. And given that summer is here, the market is now prone to downside pressure because of normal seasonality.

The fed market’s direction will largely hinge on boxed-beef sales and general spending sentiment. The packer will work hard to maintain positive margins in the coming weeks. Meanwhile, cattle feeders will try to maintain some tangible leverage in weekly negotiations. That could prove an uphill climb given that live prices have now violated long-term support with trade below $120 in recent weeks (see Figure 1 below). Meanwhile, that downward price pressure in the fed market – along with surging corn and a run of feeder cattle sales – has similarly influenced feeder cattle prices (Figure 2).  

With that segue, let’s move to June’s Cattle on Feed report. Once again the report provided some surprises revolving around placements. Only this time it was to the upside – May arrivals were up by 15% compared to 2011. That surge backfilled April’s gap. The turnaround largely stems from widespread, lingering drought across the U.S. The upsurge indicates cowherd expansion has largely been put on hold for 2012 – and we’re likely to see even more movement as the drought lingers on.

That development possesses some critical connotations for the feeder cattle market and feedyard business strategies later in the year. Figure 3 represents January-May placement totals vs. January feeder cattle supply outside feedlots. This year’s value represents nearly 35% of the total. In other words, we’re eating into the available supply of domestic cattle at an ever-faster rate.

That’s not necessarily a new story. But consider that 2012 possesses the smallest supply on record. The only means to sustain some semblance of profitable occupancy is to source feeder cattle from Mexico and/or Canada. However, given advanced placements, relative overcapacity in the feeding sector may receive a sharp blow and prove particularly challenging in the final quarter of 2012. Bottom-line, the cattle supply situation, and potential depletion, is a serious one with important consequences throughout the supply chain.

Lastly, some conversation around corn has to be incurred here. This year’s crop production needed to be stellar to provide some cushion. However, dry weather has changed the outlook dramatically in recent weeks – the unknown now largely revolves around yield. Figure 4 provides some perspective around potential yield, subsequent influence on carryover (based on current USDA usage estimates), and average price. Those are all moving parts subject to rapid change but underscore the relationship between weather, supply and ultimately price. The market is now prone to hyper-volatility based on yield projections as we progress into harvest.

It’s seemingly a never-ending theme of late – lots of uncertainty and turbulence are lurking around the markets. Remain objective, stay informed!

Nevil Speer, Western Kentucky University ([email protected])


TAGS: Prices
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