Run the pencil now so you can spy the windows of opportunity in calf prices when they appear.
Hunker down in the storm shelter long enough and it’s easy to miss the sun returning. The way markets are shaping up, though, it may pay handsomely to at least take a peek outside before pricing calves this summer.
“If Mother Nature dishes out anything that’s better than last year, don’t panic over the erosion we’ve seen in calf and feeder prices,” says Jim Robb, director of the Livestock Marketing Information Center (LMIC) in Denver, CO.
For one thing, Derrell Peel, Oklahoma State University Extension livestock marketing specialist, says competition for calves declined after the first of the year, as some cattle feeders chose to wait for a new corn year to use in risk management. For another thing, Peel believes that tight supplies are on the cusp of leading the market higher.
By the first week of June, Peel explains, beef cow slaughter had increased 15%-20% for the previous six weeks. “I think it’s already inevitable that 2013 will be another year of beef cow liquidation,” he says.
At the same time, Peel explains current statistics suggest approximately 800,000 head of Mexican cattle will be imported to the U.S. this year, vs. 1.5 million head last year. “We have been offsetting that decrease with Canadian cattle to some extent, but those imports have declined significantly, too,” Peel says.
The stage is set for a counter-seasonal rally in calf prices. Peel ran the numbers in early June, using corn at $5.50/bu. (basis Southern Plains), and wholesale beef prices averaging $210/cwt. (Choice and Select combined). He comes up with $1.65 for steers weighing 550-575 lbs. this fall: “I’d say $1.65 is the minimum, but anything above that would come at the expense of cattle feeding margins.”
Peel’s estimate is in the middle of LMIC’s fourth-quarter projections for calves to bring $163-$169. The first week of June, five-weight calves in Oklahoma City were bringing around $1.45. “Futures wouldn’t suggest nearly that good of a price,” Peel says. “Feeders have been undervalued for a while.”
Stan Bevers, a Texas AgriLife Extension agricultural economist, is even more bullish about a fall rally.
“Assuming a larger corn crop than last year, there is no reason, in my mind, that we won’t be able to demand $1.75-$1.80 for calves this fall.” He points out that even a corn crop of 11-12 billion bu. — current USDA projections are for a near record of 14 billion bu. — puts corn around $6/bu.
Bevers points out the low for calf prices last year came the last week of June. Historically, the ebb in calf prices typically comes in October. He believes this year’s low may come by the first part of July.
Though Peel is reluctant to advise against pricing calves this summer if a profit can be had, he emphasizes, “Time is on our side. Supplies are going to get tighter and tighter.”
Heavens, Robb even says this may finally be a year when producers need to consider retained ownership.
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“If you get really tight on forage and feedlots aren’t very aggressive, retaining ownership on calves could be better than it has been in 10 years,” Robb says. He believes long yearlings could get caught in a price squeeze this fall if the market doesn’t move fast enough.
“If you can pencil in $20-$30/head profit (retained ownership) even allowing for some basis risk … maybe you don’t do it on all of them,” Robb says. He adds that “cow-calf producers who don’t have a clue about how their calves perform in the feedlot will be at a disadvantage” — even with today’s extremely tight supplies.
Robb’s point is to run the pencil now so you can spy the windows of opportunity when they appear.
All of this could unravel. The corn crop or demand could run south. Or, more capacity could have exited the business than previously thought, leaving less competition for available cattle. Rational logic, though, says prices are fixing to jump.
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