Cattle producers hope for more signs of plentiful corn supplies and lower feed costs to help them deal with lower cattle prices
Declining beef demand and high corn prices dealt losses to cattle feeders last year, and they are looking for ways to minimise losses or eke out thin positive margins this year. The U.S. Department of Agriculture will update its estimates of supply and demand for major commodities on 10 February.
“We've had a very challenging year in the cattle feeding business,” said Tom Brink, vice president of risk management and cattle ownership for Five Rivers Feeding, in a presentation at the 2009 Cattle Industry Annual Convention at the end of January. Five Rivers was formed by the 2005 combination of six ContiBeef feedyards from Continental Grain Co. and four Smithfield Beef Group feedyards from Smithfield Foods, Inc. Last year, Brazilian company JBS acquired Five Rivers, which feeds about 7 per cent of U.S. fed cattle.
The average 2008 feedyard loss on fed cattle has been estimated at $150 per head, said Brink. Even a conservative figure of $100 per head on the 26 million fed cattle equals a 2008 feeding industry loss of $2.6 billion -- or more than two-thirds of the net worth of the cattle feeding industry. “We are going to see a fair number of operations carried out” in 2009, said Brink.
More than three decades of market data show that when cattle feeders lose equity, they cut their cattle purchase prices to ensure that they can hedge a profit, noted Cattle-Fax market analyst Mike Murphy. However, cattle feeders kept paying relatively high prices for feeder cattle last year, hoping for stronger fed cattle prices. Cattle-Fax analysts expect feeder cattle prices will be lower in 2009 than in 2008, and markets will track differently than they did last year. They expect that if corn prices go up, prices for fed cattle 150 to 180 days into the future will also rise. A drop in corn prices would bring a drop in deferred fed cattle futures. Those deferred fed cattle futures also will drive the value of feeder cattle, they said.
“We have seen the highs in the corn market,” said Murphy. On a calendar year annual average price basis, Cattle-Fax expects 2009 corn prices to average $3.90, after $5.27 in 2008 and $3.74 in 2007. Although corn prices are down from their 2008 highs, Murphy noted that in the long term, corn prices are still working higher. From 1973 to 2006, the average was $2.38 per bushel, and for 2007 through 2011, Cattle-Fax expects the average to be in the range of $3 to $5 per bushel.
Although corn supply and demand appear to be better balanced then they did a few months ago, Murphy warned: “We're just one crop failure away from sending prices significantly higher.”
Feeding costs appear to be moderating, but Cattle-Fax analyst Mike Miller ran through a list of negative signs for demand: Industrial production posted its biggest decline in 34 years; retail sales have fallen 4 per cent to 8 per cent; unemployment is likely to grow toward 9 per cent next year, the worst since 1945; and general economic forecasts indicate continued economic recession.
“We expect by late in the year a little better news,” he said. Cattle-Fax expects U.S. interest rates will stay low and “consumers will be shrewd shoppers,” said Miller. Where consumers spend their dollars will change, and they will cook more of their own food in the next two years. “When we start to get good news, we really might be setting ourselves up for a nice run-up in overall value of the carcass,” said Miller.
U.S. cattle ranchers are starting to keep the country's beef cow herd more stable after years of decline, said Cattle-Fax analyst Kevin Good. The U.S. beef cow herd fell 2 per cent during 2008 to 31.7 million head, the lowest since 1963 after declines in 11 of the past 13 years. U.S. fed volume will follow with a 2 per cent decline, but fed cattle carcass weights will rise, leaving a decline of 1 per cent or 1.5 per cent in U.S. beef production this year versus last year.
Competing meat production also will decline, by about 2 per cent for pork and 2.5 per cent for poultry, said Good. U.S. per capita beef consumption will fall to it lowest since the 1950s, while per capita consumption will hold about steady for pork and decline slightly for poultry.
“The supply side of the market is very bullish, and at some point in the future it will matter,” said Good. The distressed dairy industry is likely to weigh on beef prices in coming months, as dairy producers send more of their animals to slaughter to curb excess milk production. January average U.S. milk prices were down about one-third from a year earlier and futures for milk used to produce cheese fell by about half since last summer.
To read the entire article and view corresponding graphs, link here.