Uncertainty: Close emphasizes ambiguity as the theme of 2019

“It’s hard to find a market that is more emotionally charged than the one we’ve been in year to date, with so many disruptions,” said Don Close of Rabo AgriFinance during BEEF Magazine’s 2019 Beef Market Outlook on March 27.

2019 started with projections indicating record protein production across beef, chicken and pork. 

In addition, trade uncertainty with China has caused unrest in the markets. 

Close said, “Short term, we’ve had record interest in the live cattle market, the seasonality of that and the impact of open interest going forward.”

“Finally, the severe weather we’ve had all winter long, coupled with the exceptionally severe weather in Nebraska and Iowa in the last several weeks, have also played a role,” he continued. “This market volatility isn’t going to go away anytime soon.” 

Market drivers

While all factors impact the market, Close said it’s important to distinguish between true market drivers and temporary noise.

“We started this year expecting to see record production across all species,” he explained. “We looked at broiler production to be up 2.5 percent for the year, and we look at beef production to be up three percent for the year. We also expected hog production to be up five percent.”

While pork and broiler production are not far off of Rabo AgriFinance projections, recent catastrophic flooding in Nebraska has thrown beef estimates off course. 

“We’ll probably pull some of the production off the beef side,” Close said. “I do think we’ll still see a dependence on incentivizing packers to maintain aggressive Saturday slaughter. Tonnage will be an issue going into the year.” 

“With record domestic protein production by itself, I don’t think producers have any choice but to have a conventional risk management strategy in place,” Close said. 

U.S. cattle herd

In 2019, only a one-half percent increase in total beef inventory was seen in the U.S., but Close said he believes the herd is still growing, albeit slowly. 

“Our view is, we think we could see beef cow numbers peak out somewhere close to the 32 million level,” he explained. 

At the same time, an abundance of winter moisture in 2018-19 means the year will start with “incredibly good sub-soil moisture,” said Close, noting there will be incentive to run as many cows as possible, even adding replacement heifers to the mix. 

He summarized, “I think we’re still growing, but at a very modest pace.” 

Prices

At the beginning of 2019, Close projected a high of $1.25 in steer prices, which he bumped to $1.30 following a string of severe weather events across the country.

“But, with $1.28 to $1.30 market we had last week, and trade on March 27 at $1.26, I think we’re in the process of seeing this market roll over,” he said. “I think it is as good as it’s going to get right now.” 

One interesting piece Close sees is  markets are performing on par with expected prices, and prices have reflected the market drivers in the industry.

“I think that should give us a degree of comfort that the price forecast will hold up reasonably well,” Close said.

Looking out

As he analyzes the fed cattle market throughout the rest of 2019, Close re-emphasized the market was at its seasonal high in late March. 

“The period of time that has given me concern throughout most of the winter is the May to June or May to July window,” Close said. “I think there are enough cattle that have been on feed this winter and that have been delayed, and as a result of that, from May 1-15, whether they’re ready or not, I think we’ll see the first of the new crop calves come to market at the same time we’ll be struggling to clean up the remainder of the long yearlings.” 

He continued, “So, in the May to July period, I’m concerned we’ll be trying to force two sets of cattle through the market at the same time.” 

The result will be a hefty initial drop in prices, which may be more severe than Rabo AgriFinance’s predictions. Currently, he projects a seasonal low at $1.05, which he believes is a solid forecast.

“There is a tremendous amount of uncertainty in our seasonal low, however,” he said. “The real impact will come in the second half of the year.” 

Feeder cattle

For feeder cattle, looking through market noise, weather conditions and seasonality of the market, Close said he is surprised to see such aggressive placements in cattle. 

“I think feeder cattle are going to be vulnerable,” he continued. “In a recent trip, I also saw a larger number ofcattle still out on wheat than I expected to see.” 

A number of feedyards are “jammed up,” working to get cattle through while dealing with mud and weather challenges.

Close summarized, “We’re going to have enough cattle going through that we see pressure on feeder cattle. Once we get through the spring low, I’m looking at a very seasonal trend going into an August high at roughly the $1.50 level.”

He added, “I think it’s time to get some price protection in place, if producers haven’t already.”

Calf market

For Close, calf prices provide the biggest area of uncertainty.

“The price rally we have seen in the last two weeks, along with soil moisture and expectations for the summer grazing season means grass fever has kicked in over the last couple of weeks,” he said. 

Before that, however, lightweight cattle trading and hedging offer opportunity for producers, but Close cautioned that producers may be getting overzealous for demand for calf prices. 

“With so much uncertainty, I’m going to take a rain check on a price forecast for calves right now, because there are just too many unknowns in the market today,” Close said. 

The 2019 Beef Market Outlook was sponsored by BEEF Magazine. 

Saige Albert is managing editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.