CattleFax analyst cautions industry about front end supplies
Greeley, Colo. – The beef industry may be facing a low performing year due to front-end supplies in the cattle market, according to an analyst with CattleFax. Warren Prosser spoke to beef cattle producers, feedlot operators and packers about Prospects for Profit in 2013 during Beef Day at the Colorado Farm Show in Greeley, Colo.
According to the seasonal index for the last 20 years, cash prices for cattle typically rally in the spring, drop off during the summer and rally again in the fall. Prosser said this year, cash prices have fallen during the last few weeks.
“Odds are, we won’t be as seasonally robust as we are in a lot of years,” he explained. “We need to move supply or demand to fill these holes. Placements have been down the last several months. Everyone is holding cattle till spring.”
Prosser said the industry is expecting higher prices the coming year, but he feels they may be setting themselves up for a disappointment because of front-end supplies.
“Lower placements and lower cattle numbers do not mean higher fed prices with certainty,” he explained. “Risk management is a very important tool.”
“We have had a carryover problem. The data is screaming we are carrying cattle. It is causing underlying problems because the market has encouraged us to carry cattle. It makes me question how strong fed prices will be,” he said.
Prosser said based on the data, they believe prices will be higher than a year ago, but maybe not as high as the futures market continues to trade.
“Placements may be down eight to 12 percent, but not unless we get moisture. If we don’t get moisture, they may be down about five percent. If we get a whole lot of moisture, they may be down 15 percent. With carcass weights going up, production may only be down two to five percent,” Prosser added.
Net beef supplies are expected to drop one to three percent this year.
Prosser noted that although trade relations with Japan look good, it will only slightly offset the trade loss with Russia. Trade with Mexico has also dropped off.
“Four years ago, we were the fourth cheapest beef in the world, and now we are the second highest,” he said, asking, “How do you ship more product when your product is the second highest? We can do it, but it is harder to get the volume out.”
Prosser said the percentage of kill may hit a 10-year high this year with exports.
“We will have less product to ship, but we will receive a higher price for what we do ship,” he said. “The bottom line is we think beef prices will be up one to five percent, even with beef placements down eight to 15 percent.”
The fed market may struggle because of leverage, Prosser continued. The packers may lose some leverage as they kill some of the front-end supplies, but they will put more product on the market.
“I think the price will average $1.25 to $1.27 this year, compared to an average of $1.23 last year,” he said. “But, if they don’t clean up the front end [supply], drop our forecast two to six dollars. We need to get people to quit carrying cattle.”
Prosser said if it rains, the market may go higher.
“If it doesn’t rain, corn won’t be as cheap as we have it, and more dairy cattle will be slaughtered,” he continued. “The futures are saying cheaper corn and higher live cattle. We need to know that because that is how feeder cattle are priced.”
Feeder cattle trends
Looking at the next 12 months, Prosser said the general trend in the futures market is upward.
“It has been a bull market,” he said. “The futures have been trending upward since 2009. They are optimistic. It looks a lot different than the cash prices we have received. The cash market has never got as high as the futures are.”
“Markets are not only anticipatory, but they also tell you and I what to do,” Prosser continued. “Feeder cattle are not priced off what live cattle are selling for today. They are priced off the futures feeder cattle market and futures corn price.”
“The markets figure in supply and demand and balance all that,” he said.
From 1999 to 2009, the largest factor affecting fed cattle prices was inflation, with supply being second.
“Supplies being down helped improve prices 14 percent,” he said. “But, inflation was still 29 percent. Beef demand was down 12 percent, and leverage was down four percent.”
“If the packing plant has the capacity to kill 800,000 a day, and there is only 600,000 for sale, the packer has to bid it up. If the packer, retail and exporter are not profitable, it will come down to making a change,” he explained.
Prosser told the crowd the packer and feedlot segments are undergoing adjustments because of reduced supply. The steer and heifer kill has been down 1.2 million the last two years, although 1.1 million of that number can be attributed to feedyards with less than 1,000 head in Iowa and South Dakota.
“Why are they not shutting down in those areas, but a Cargill plant in Texas is?” he asked. “Most likely, it is because some of the larger yards are buying some of the smaller yards.”
During the last several years, data showed cattle on feed three percent above the year before, but kills were actually 97 to 98 percent.
“It is an important trend because the data we see is less predictable,” he said. “Small yards are going down, and larger yards are going down, but not at as high of a rate. There is a lot of consolidation going on in the industry right now.”
With less feeder and calf supplies, and no change in feeding or slaughter capacity, they are all in the red ink because of over-capacity, he noted.