This spring’s market is caught in a vortex of weather and demand.
It’s shaping up to be another year of too much for some folks and too little for others. Now it appears the question is this: will it be too much, too soon for corn farmers and too little, too late for cattlemen?
The talk all winter and early spring was the lack of moisture and the persistent drought, with some areas going into year three of exceptionally dry conditions. Then, for parts of the country at least, the moisture conditions improved significantly. In fact, the concern now through parts of the Midwest is delayed corn planting because of too much moisture.
But the wacky weather has done more than just delay corn planting. It has caused the widest price spreads for feedstuffs and cows ever recorded, with similar bred cows selling for as much as $800 different between drought areas and areas with moisture. The price spreads seem exorbitant even with today’s trucking costs, but one of the things that the recent bouts of forced liquidation has taught producers is that the environmental impact on moving cows is tremendous.
Shipping cows from South to North, East to West or vice versa, is more difficult than anticipated. The acclimation factor is significant, and the length of time it takes for a cow to adjust to her new surroundings is time and money lost. As a result, producers are pretty committed to buying replacement females from similar geographic and management systems. The result is a more pronounced trend of regionalization in the female market.
And then, of course, there’s the feeder cattle market. The demand for grass cattle, or lack thereof, was reflected in the latest Cattle on Feed report, where more calves entered feedyards. Part of this increase is due to producers running low on feed and wanting to save limited feed inventories, but it is also a reflection of weaker-than-normal grass demand. In part that’s moisture related, but it’s also aided by unseasonably cool temperatures that have kept the grass from popping in a lot of areas. Consumer demand has also been disappointing, fueled by the cooler weather and the slow start to grilling season.
It has widely been assumed that the extreme spread between feeder prices and fed prices would continue because of tight supplies and overcapacity in the feeding industry. However, it is also becoming obvious that cattle feeders must lower procurement costs.
According to data from the Livestock Marketing Information Center, cattle feeders have lost money now for 24 consecutive months. The old rule of thumb is that feeders will buy back some profits after 2-3 turns of losses on the fed side. We have exceeded that time period, and there doesn’t seem to be any end in sight for cattle feeders. Feeders are pretty adept at managing the risk associated with higher feed prices, but the fed market’s inability to match expectations is now being felt in the feeder and calf markets.
Cattle feeders will continue to be under pressure, but there is a limit to how much loss they can sustain. If demand continues to disappoint and cannot overcome the price limitations placed on it by the pork and poultry industries, the long-promised increase in prices may fall well short of expectations. I’m still highly optimistic about price trends, but it is becoming increasingly obvious that expectations for prices may be overly bullish.
Tight supplies aside, we may have underestimated just how much demand the beef industry continues to lose, which means the decline in numbers perhaps is more reflective of true market conditions than first thought. As an industry, that’s a sobering wake-up call. Analysts have been telling us that the cattle industry must shrink as a result of the new realities created by the subsidization of ethanol, but it is also widely believed that the drought and other negative factors has caused the industry to liquidate too much in the short term.
While the beef industry is still poised to see record high prices moving forward, we must heed that wake-up call. If we do not do something to actively improve beef demand, we will continue to see this industry shrink. While we are a long way from the sheep industry, the trend lines are scarily similar.
Cattlemen made great strides in the late ‘90s and early part of the 21st century to stop the erosion in beef demand by investing and rallying behind a long-term strategic plan to build beef demand. The failure of this industry to focus on and invest in growing demand over the last five or so years is now being felt, and the sad reality is that this too appears to be a trend as well.
This industry should be looking toward a new era in beef prices. Instead, it appears we are looking at a narrow window of “good” times in the context of an ever-shrinking beef industry. If so, the “good” times will not meet expectations.
The best news on the demand front is that consumer confidence in April showed an uptick after declining in March. Confidence levels are still low, but hopefully April is an indication that they are on the mend. The marketplace is continuing to adapt to changes and one thing is for certain, the rules of recent years no longer apply. Pundits are even suggesting that retained ownership may once again be a viable alternative in the near future.
It is probably too much to ask for, but what we need from Mother Nature is increased moisture in the Central and Southern Plains, a short-term dry spell in the Corn Belt, and warm, dry weather on the coasts.
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