With feeder cattle and fed-cattle prices hovering around all-time highs, optimism is the driving force in the market these days. The optimism has people openly talking about $90/cwt. fed cattle, with some claiming that the industry has moved into a permanently higher trading range for all classes of cattle. The exciting thing is that a large percentage of this optimism is justified.
Demand has been tremendous domestically, the export markets appear to be rebounding and the U.S. has been able to capitalize on Canada's loss of markets due to its single case of bovine spongiform encephalopathy (BSE). Thus, the demand outlook for the short term will undoubtedly remain strong. The checkoff has been quite successful both in changing consumer perceptions of beef and in helping bring new products to the marketplace. Plus, there's the significant boost administered by the growing popularity of the Atkins diet. In addition, the success of a multitude of branded products, coupled with an industry focusing on carcass quality and consistency, has undoubtedly helped bolster demand. Projections are for the economy to continue to grow in the near term, as well.
However, there are some caution flags that producers should be aware of on the demand front.
- With oil prices on the rise, there's potential for the fragile U.S. economy to be sidetracked.
- As the price spread between beef and its competitors (pork and poultry) continues to widen, we will eventually reach a point where the retail industry will shift their featuring to these products.
- Longer term, the industry may lose its ability to grow demand if the checkoff is ultimately ruled unconstitutional. In addition, with loss of the checkoff, it's likely that our more integrated competitors would again begin to erode beef's growing market share.
- Even though the export market has been the driver for increased beef demand for more than 20 years, there's reason for anxiety in this area. For instance, the U.S. beef industry is well behind the rest of the world in terms of developing and employing the animal identification and traceback mechanisms that the export market is increasingly demanding.
- And, of course, there's always the specter of BSE turning up in the U.S. One must remember that a four-letter word -- luck -- was the main reason BSE was found in Canada and not in the U.S.
On the plus side, supply will be continue to be price supportive in the short term. We're currently in what should be the tightest supply period of this cattle cycle. Meanwhile, the feeding industry is extremely current. And, as expansion begins, feeder supplies will tighten even more.
That expansion is expected to start slowly, as prices this fall will encourage the selling of heifers as feeders rather than holding them back as replacements. However, continued improvement in genetics has given he industry the ability to increase tonnage rapidly by taking cattle to higher weights.
The cattle feeding industry is currently buying much higher breakevens. That leaves the industry less room for error in marketing cattle. If we lose currentness, tonnage and marketing leverage will shift, prices will fall, and the same cycle that we have been in for the last nine months could repeat itself -- in the opposite direction.
The industry should be enjoying these record prices, and there are substantive reasons to be excited about the future. However, at these lofty levels, it's also healthy to maintain a little skepticism and remember that managing risk is increasingly important.
The events of Sept. 11, 2001, unfounded rumors of foot-and-mouth disease in the U.S., and the discovery of BSE in Canada illustrate this aspect very well. All of these incidents had dramatic impacts on the marketplace and all were events that could not be planned for or anticipated.