Wednesday, October 26, 2011
Cowboys: If They Are Making Money, Here’s How
If you are raising cattle, you are involved in one of many dynamics currently underway in the beef industry. Fewer head, more headed to feedlots, and more being shipped overseas. The industry is having difficulty with its identity. It certainly wants to be profitable, but how does it do that in the wake of the dynamics that are pushing and pulling?
The recent October Cattle on Feed report indicated that feedlots grew by 4.9% after deducting the marketings during September and the number of cattle entering feedlots. While that may seem bearish, the two futures trading sessions following the release of the report went in different directions. On Monday, prices headed higher, outweighing concerns that recent high prices for cattle futures aren’t justified by beef-demand fundamentals. But on Tuesday, futures fell with profit taking, as some traders continue to remain cautious that underlying fundamentals might not support historically high prices.
Last Friday’s CoF report was expected to show placements down by 3.5%, but they were up by 0.2%. Not much, but certainly a different direction than expected. Cattle of all sizes and shapes continue to move out of the drought-impacted area, which is centered on Texas and radiates out to all contiguous states.
The continuing liquidation has now reduced the US beef herd by 12% from the latest bump in 2007, says Purdue economist Chris Hurt. Much has been written about the impact of the drought on the southwest livestock industry, as numbers of cattle keep dropping. The two dynamics involved are the high price of feed due to commodity demand, and the shortage of forage. Both are forcing cowboys to take action whether they want to or whether they can afford to do so.
Purdue economist Chris Hurt calculates that the scarcity of forage, whether pastures or bales, has pushed prices above the cost of corn, and feedlot numbers are growing because corn is cheaper than grass. With corn prices falling during most of September, many more bushels of corn were pumped through cattle than forage. With a 14% increase in the number of lightweight animals entering feedlots, they will be there longer than usual as operators are counting on finding more corn and DDGS around than grass.
In his opinion, Hurt says the cattle market is being driven by:
1) The anticipation of very limited 2012 domestic beef supplies;
2) Foreign buyers of US beef who are willing to pay the high prices; and
3) A more optimistic tone for the world economy.
Regarding the dynamic involving exports, Hurt says, “Foreign markets are buying a record amount of beef at record high prices. USDA now expects a record 2.7 billion pounds of beef to be exported this year, representing a record ten percent of domestic production. A new record is expected to be set next year with 11% of production moving to foreign consumers.” That compares to only 5% in 2007. (In a related note, the pork industry is also expecting a record amount of pork being exported when the books are closed on 2011.)
Continued foreign demand for US beef will create a strong demand and keep bids high. While the recently implemented South Korean trade agreement will not have an immediate impact, the Koreans and other Asian consumers have been strong fans of the US beef. The strength of their economies will help support that demand, and the price of beef.
What the cowboys and pork producers will have to watch in coming months is the amount of grain being fed. If there is more corn fed than USDA’s numbers predict, then usage will grow faster than expected, and corn prices will gain upward momentum. And higher prices will not only change the dynamics on pork expansion, but also on financial strategies around cattle feedlots.
Summary:
An increasing number of cattle continue to enter feedlots, pushed by shortages and high prices of forage, and the relatively economical price of corn. A substantial amount of cattle being marketed is diverted to the export market, which has remained a strong bidder and kept prices high in the wake of listless domestic prices.
Posted by Stu Ellis on 10/26 at 12:00 AM | Permalink
Comments
Posted by: Jib at October 27, 2011 3:03AM
A trip to Vegas is inspiring. The lights at night are awesome. To have a chance to meet the people is just as wild. A “young” man was making quite a s scene as he rolled at the craps table. He was yelling at the dice with every roll. He was making quite a haul. When I reached into my pocket to join the fun, he said, “Farmer” (How in the world can they tell we are farmers?), “Farmer”, he said, “Keep your money in your pocket. The table eats “scared money” and yours is as scared as it gets. Your money will bring us all down.” I did not play; that gesture included myself in the “many” viewers of the game. In an hour and one half time of “fun” the young man turned $200 to $2,150. Most of those that were “with” him made more (generally because they had more to bet) if they quite when he did. The other did not fair as well. It was true entertainment, maybe enhance by a “lady if the night” rubbing against me like a barnyard cat. I assumed that was her profession, although no “terms of endearment” were discussed . . . she called me “Farmer” as well. Mommas watch your young lads. We have been marked as the “new” rock stars.
I have once again fallen off the point of the story. The term “scared money” has yielded some thoughts. I generally am not a believer in long put strategies. The cost and complexity (matching deltas, fencing strategies etc.) is not what I want (not to say they can’t be the berries” for someone else). That believe is being challenged by the following antidotes and situations:
-USDA decreases confidence when they ask; “Why do you believe our soybean number and not our corn?” My … if the keeper of the record does not know what the problem is, we have a problem!
-The keeper of the record also states; “We know we have a problem with the feed number but nothing seems to make sense so we will do nothing and keep it as it is.”
-Domestic wheat price are being “held up” by “high” corn prices. When/if corn stock are adequate for feeding, wheat stock could/should pull corn prices down.
-Adequate corn acres may be hard to find with corn on corn yield drag
-World production seems to meet wheat demand but there might be a limit to the substitution of wheat for coarse grains.
These conditions may warrant put or put like protection at the next several reports. Protection may only be needed just on the day of the report. One needs to wonder; “What is the upside one is expecting to accept the risk of a USDA report?” If the risk reward relationship is warranted fine. Some of us need to think of potential price drop as a dollar per bushel versus tax payment.
The stocks report seems to be the key reports although the monthly WASDE report can have their own “fun”.
Jib aka Gibberish
Ps Those in the Quincy, Illinois area say; “Hi” to the Menard Manager for his thoughtful advise.