“Certainly, it was bad news, but so far it doesn't appear the sky is falling,” says Darrell Mark, Extension ag economist at the University of Nebraska.
Indeed, the worst fears that many producers harbored about what would happen to cattle prices if bovine spongiform encephalopathy (BSE) ever turned up in the U.S. have so far remained unfounded.
Fed-cattle prices dropped 18-20% from $92/cwt. prior to the Dec. 23 announcement to the $75 cwt. they were fetching afterward, through Jan. 10.
Not coincidentally, that price decline mirrors the 1.6% decline in fed-cattle prices Mark would expect for each 1% increase in beef supply. In this case, the loss of export markets would account for a 14-16% decline in price. An additional 2-3% decline in fed cattle prices would be expected due to the loss of the hide and offal export market. Chalk the remainder up to the exaggerated impact that always rides shotgun with market shock.
The Future Looks Bright
“You can't minimize the loss of our export markets,” says Bill Helming, a leading agricultural economist, Olathe, KS. “We're looking at lower prices than had been predicted due to reduced export demand, and you can't underestimate the psychological impact on the market.”
However, Helming also believes there's plenty of room for optimism. In fact, he says, “It's very much in the realm of practicality and reality that we can be back to an $80-$100/cwt. trading range for fed cattle within the next two or three years, but not in 2004.”
In the meantime, the assumptions such a bullish prediction rests upon would make for prices that many would consider downright strong.
First, Helming points to the strength of U.S. beef demand prior to the Dec. 23 discovery of BSE. This was built on a number of factors including increased eating satisfaction and a growing array of convenience products fostered by the industry. In tandem with that, Helming points to consumers turning toward protein-rich diets in light of this nation's obesity and diabetes epidemics.
“Consumer demand for beef is real,” Helming says. “American consumers are intelligent. They're as comfortable with the safety and eating qualities of beef today as before the announcement.”
While it's early on in the BSE aftermath, Mark concurs, saying, “Every indication up to now is that the American consumer is reacting like the Canadian consumer did when BSE was discovered there.” Canadians rallied around the industry and never missed a consumptive beat on beef. So far, Americans have done the same.
Just as important, even with the extra beef to sell by way of lost export markets, Helming notes fundamentals say that beef supplies will remain tight.
“Clearly, we have excess feeding capacity. That won't change,” Helming says. “Clearly, it will be some time before live cattle from Canada are allowed back in the U.S. (750,000-1 million feeder cattle annually). At worst, herd liquidation will stabilize this year, but we won't begin rebuilding the cow herd.”
All told, Helming expects U.S. beef production to be 3.5% to 4% less this year than last.
Add this to his expectation that the U.S. will be able to resume export trade with Mexico in weeks rather than the months it will probably take with the rest of the world. “I believe a realistic trading range for fed cattle this year is $65-$85/cwt. ($75/cwt. average),” he says.
If things fall right, like Mexican exports opening soon and cattle feeders remaining current in their marketings, Helming says you could add another $5/cwt. to those projections.
As for feeder-weight cattle (basis 750 lbs.), Helming is calling for them to trade at $7-$10/cwt. premium to fed cattle. He expects feeder calves (basis 500-600 lbs.) to trade at an $18-$22/cwt. premium to fed cattle. Bounce that against the $75/cwt. fed-cattle average cited above and you're talking $82-$85/cwt. for feeders and $93-$97/cwt. for calves. Of course, this price scenario assumes there won't be any more catastrophic news.
Moreover, no one knows whether or not the market has found its BSE bottom.
“It all depends on so many things, including domestic demand, the speed and outcome of the BSE investigation and resumption of export trade” says Mark.
“In Canada,” he adds, “they didn't trade cattle for two or three weeks after BSE was discovered in May. When they did, cattle traded for $20/cwt. (US) less than before. Two months later, they bottomed out at $23/cwt. — $50/cwt. less than the pre-discovery price — when it became evident the export trade wasn't going to resume. So, there was a lagged economic effect there. We may not see that lagged effect here, but it's possible.”
In other words, Mark predicts producers can expect more price volatility in the coming weeks. Producers have already seen limit-down and limit-up moves in the futures market since the discovery.
“We'll continue to speculate in the markets on the resumption of export trade the way we speculated last summer on re-opening of the Canadian border,” Mark says.
This anticipated price volatility underscores the need for managing price risk. Whether it's through the use of forward contracts, futures hedges or options, Mark urges, “Look hard at protecting a breakeven and hard at finding a breakeven you can find protection for.”
Breakevens in the low- and mid-$70s are available, he says. It's cattle already in the feedlot with breakevens of more than $80/cwt. that will likely bear the economic brunt of the BSE incident.
Perhaps the biggest price wild card of all, however, is one that producers can ultimately control.
According to Helming, there were two primary reasons for the record prices enjoyed prior to BSE. One was the robust domestic and export demand. The other was currentness.
“The industry became as current as I can remember, going all the way back to the 1960s,” says Helming. “What the market actually does in 2004 will largely depend on the actions of cattle feeders. It's critical they remain current and don't let weights build.”
Helming doesn't think that will happen, though. Both in the near term and as far as the eye can see, he says, “I like beef's chances.”