Extension by John RittenWritten by John Ritten
More Uncertainty Ahead
By John Ritten, UW Extension Production Economist
There appears to be a general lack of direction in the current cattle markets. Some signals appear to be positive, while others are less so. Fairly strong fundamentals provide a good-looking forecast for the cattle markets in the near future.
The national herd appears to be nearing a rebuilding phase. While year-to-date cow slaughter has not decreased enough to initiate rebuilding, cow slaughter over the last month is sufficient to stop the herd downsizing. If this trend continues, national herd stabilization, if not rebuilding altogether, is quite possible this year.
Heifer retention appears mixed, and varies by region, but the coming months will likely signal whether or not we are entering a rebuilding phase. Regardless, the liquidation cycle appears near an end, and if heifer retention increases, an even shorter supply of calves will be available this fall. The result is that feedlots will likely bid aggressively for placements.
Lower corn prices expected
Another positive sign for the cattle industry is the expectation of lower corn prices this fall. While remaining stocks are still tight, expected plantings are the highest they’ve been in some time. In addition, the recent crop progress report shows over 70 percent of expected acres are already planted. This compares with the five-year average of only 47 percent of expected acres planted by this time. Perhaps more encouraging is the fact that 32 percent of acres have already emerged, where only 13 percent of acres have emerged by this time on average over the last five years.
While none of this guarantees a good harvest, the markets expect that there will be an increase in corn availability this fall. At the time of this writing, December contracts were right at $1.40 lower than May contracts. Again, if feed costs are lower, feedlots will be able to bid more for placements.
Demand is ‘worrisome’
While tight supply and decreased feed costs are sending good signals for calf prices this fall, demand is a bit more worrisome. While the recent BSE scare had a relatively short impact on the markets, I’m not entirely convinced we are completely out of the woods yet. Currently, only Indonesia (a relatively small importer) has declined our beef. However, if one of the larger Asian importers decides not to take our beef due to the recent BSE scare, we could be in trouble. Currently, net exports account for over $3 billion dollars annually to the industry, and over 10 percent of total production (based on total carcass weight). Both of these measures have been rising steadily over the last seven years, and any restriction on exports will have a drastic impact on cattle markets.
The second issue on the demand side is the domestic concern over lean finely textured beef (LFTB). It appears as though we are past the worst effects of LFTB, but some market impacts are still lingering. Even as the market impacts are decreasing, and will likely be completely erased in the coming months, I’m not sure we would be able to weather another similar occurrence. While Americans like cheap hamburger, it is unknown if their tastes will be impacted by LFTB in the long run. This is exaggerated by the fact that Americans are now eating more chicken than beef (on a boneless weight basis). More disturbing is the fact that the difference has widened (in chicken’s favor) over the last few months. If LFTB or similar practices are not available, and the cost of producing hamburger increases, I expect this trend will continue.
Markets: looking ahead
So, there are a few competing forces that will impact the markets in the coming months and years. The tight cattle supply and expected lower grain prices should ensure elevated calf prices this fall. However, any ban on U.S. beef overseas will likely counter both of these forces. While LFTB seems to be just about done impacting the markets, one can never tell when the next similar report will surface.
Also, any unforeseen catastrophes on the corn crop may limit what feedlots are able to pay for calves. For now, given how the markets have weathered the recent storms, I am cautiously optimistic for calf prices over the next few years. However, the market should come into better focus as we get deeper into the growing season and further away form both BSE and LFTB.