Thursday, November 03, 2011
Cattle Prices Are High, But Manage Your Downside Risk
Cowboys may be riding high, but are they on the bucking horse at the national rodeo finals or are they on the nickel horse outside the grocery store where Mom is shopping? Depending on their investment in the industry, both can be quite exciting. But the new dynamics that seem to be impacting cattle prices every day have created challenges for even the best of livestock managers.
Fed cattle prices in the last several weeks have been 20% more than they were a year ago, which is quite significant when you compare it to historical data, and compared to the record prices of last spring. It makes you wonder how prices could be in the $120 range when tens of thousands of head are being slaughtered early because of the drought in the Southern Plains. Iowa State University livestock economist Shane Ellis writes in his recent newsletter, “Looking at the futures market prices for fed cattle, a steady bullish increase in cattle prices is expected by the market place over the next year which would be a deviation away from the normal seasonal declines.”
He contends there is a synergy of market forces that are piled on top of each other. Any individual one would be enough to move the market, but when you have all of them at once, the market will respond with unexpected strength. The situation is almost opposite of the grain market, in which numerous outside market forces have combined to push prices lower, despite fundamentals that would normally produce a bullish market. (See the Nov. 3 Farmgateblog.com.)
What are those bullish factors that are supporting the beef industry?
1) First, beef production during the coming year is expected to decline 4-5%. That is a combination of low inventory, combined with higher than usual marketings because of the drought.
2) Second, fantastic foreign demand has taken export volumes to record highs. Beef exports are 27% higher than 2010 and 50% higher than 2009
3) Finally, domestic demand has been steady despite the higher price of beef at the retail counter and reduced restaurant meals.
How long will this last? Shane Ellis says it is a reasonable expectation for several years. The supply is limited. The demand is high. And he says the market has steam. But he is also quick to advise the cattle industry that even though the supply is predictable, the demand is not. Pointing back to the second half of 2008, he said prices dropped 20% and set the stage for prices throughout 2009. He says if you want to learn from that lesson, get your price protection in place now, in case of a nasty surprise. He points to all of the outside economic forces that are depressing the grain market at present and says they could roll into the cattle economy. And he adds, “In the face of so much uncertainty, risk management is now paramount. For cattle producers, protecting the value of your cattle may be as important in 2012 as price protecting your feed was in 2011.”
You probably saw some or all of the numbers from the latest Cattle on Feed Report, but what is their impact in the next few months? Shane Ellis says placements appear to be getting back on track, since the seasonal numbers began about two months early due to the drought. The light weight calves entering feedlots have been above the five year average since June. Heavy weight placements were near normal until late summer when numbers dropped off. He says cattle that would have gone to stocker pastures during the summer to gain a couple hundred pounds were sent to feedlots early. And he says by the end of the year, the feedlot inventory should be back to levels that are parallel of 2010.
Summary:
Beef prices have been high because of a combination of factors that include the declining inventory, the drought that resulted in early marketings, and a phenomenal export demand. While the supply is predictable, the demand is not, and producers should manage their downside price risk.
Posted by Stu Ellis on 11/03 at 09:50 PM | Permalink