I have known for some time that I would need to write an article, but I didn't know what to write. I have had numerous cattle producers ask me what they should do with their calves this fall. I don't know what to tell them. As an agricultural economist, I have been trained to look at fundamental forces that shape supply and demand conditions and then be able to make an intelligent statement about the direction the market should move in the next few weeks or months. I am having a very difficult time using fundamental analysis to explain what I am observing in the market place. Since I don't know what the future holds, let me review the past and then try to explain the future based on that recent past.
Let me start with a review of the corn market. Dec. corn on the CBT has declined from $7.75 per bushel in mid June, to $5.50 by mid September, to just over $4 in early November, to a present price on Nov 19th of $3.79 per bushel. The cost of gain for calves in a feedlot based on those expected corn prices, declined from over $100 per cwt. of gain to near $65 per cwt. of gain. If I new nothing else, I would say that should have made for a fairly strong calf market this fall. At one time, we lived by the rule that a dime decrease in the price of corn was worth a $1 increase in the per cwt price for calves. That would imply calf prices should have increased by $40 per cwt.
Calf prices are also based on expected fed cattle prices when they will be slaughtered. The Apr. Live Cattle futures on the CME were at $116 in mid June, a price that was probably not justified by the market fundamentals. By mid September, the Apr. board had declined to $106, perhaps a fundamentally justified price. In early November, the Apr. Live Cattle contract had declined to $96, a price that given present supply and demand fundamentals was probably a little under the market. On November 19th the Apr Live Cattle contract closed at $86 per cwt. That is a loss of over $450 per head in the expected value of a slaughter steer in April.
Based on those corn and fed cattle expected prices, I would have expected a 550 lb steer in Nebraska to sell for $138 per cwt. in the fall based on the June expectations, and then to decline to $130 per cwt. based on the September and early November expected prices. The November 19th price would be about $115 per cwt for a break-even. However, 550 lb steers in Nebraska auctions in October and November only averaged about $110 per cwt.
I think I can explain that price difference. Feedlots have lost on average about $90 per head this year. Over the last two years they have lost on average about $55 per head. In October and November of this year they were losing about $150 per head on every lot sold. Feedlots needed to regain some equity if they were going to continue to operate. They had been burned badly the last two years as corn prices increased and fed cattle prices decreased throughout the feeding period. This fall, they were attempting to buy the calves with about $100 per head profit in them. If present future prices hold into April, they will likely lose $30 per head or more on those calves they just purchased.
Ok, I am feeling a little better about my abilities to explain the markets. Calf prices appear to still be based on fed cattle prices, corn prices and feedlot profitability, just like in the past. But why have the live cattle futures declined $10 per cwt in the last few weeks of trading? Cattle on feed numbers are below a year ago, and placements have been below year ago levels for the last few months. So, on the supply side of the market, this sell off is not justified. Our year over year exports of beef have increased and are expected to increase next year. That should also support higher prices. Restaurant demand for beef has declined and retail sales may decrease as well, but that was likely the market adjustment in dropping fed cattle into the upper $90 per cwt. range earlier this fall.
Wait, what is that sucking sound I am hearing. It is the #$%$#@% stock market. The Dow Jones Industrial Average just dropped to its lowest level in the last 5 years. I thought we bailed that out last month. Yet it seems as though trader fortunes and business equity is headed South quicker than a North Dakota wheat farmer following the first fall blizzard. Not only is the stock market sucking all the equity out of everybody's 401K retirement accounts, it is sucking all the long hedge funds out of the commodity markets. It is also sucking the will out of the U.S. consumer to spend money on anything, at least that is what traders believe. Therefore, Live Cattle futures are dropping in expectations of a prolonged recession and drastically reduced domestic beef demand.
I am not that pessimistic, but I am convinced that we will not see any significant rally in the commodity markets until the stock market stabilizes and starts the gradual climb out of the abyss into which it has fallen. When a credible voice can assure me that stock market has hit bottom and that 400-500 point swings in a day on the Dow are done, then will I venture to forecast fed cattle and corn prices and therefore feeder cattle prices. Perhaps I will also give you some advice on what to do with those calves you have not yet sold.
Lastly, may I suggest that you forget about the markets for a week, and enjoy your family and friends over the Thanksgiving holiday? Be grateful for all the bounties we do enjoy in this great land. -Dillon Feuz