Volatile Cattle Markets: Navigating management options through uncertainty
Uncertainty is a common household word today, especially in terms of cattle markets. In a Cattlemen’s webinar presented by the National Cattlemen’s Beef Association (NCBA) on June 18, Senior Animal Protein Analyst with Rabo AgriFinance Don Close and Oklahoma State University Extension Livestock Marketing Specialist Dr. Derrell Peel share strategies for managing risk through volatile markets.
Market considerations
“If we don’t like the market today, just wait because we will see an entirely different set of circumstances next week,” says Close. “The volatile markets and uncertainty will not be going away any time soon.”
“We expected a short and shallow downslide to the market, but with COVID-19, we can’t say that anymore,” he continues. Close explains we can expect to see this market cycle continue for the next 18 months to two years.
Currently, the U.S. is holding between 30.5 million and 31 million head of beef cows, which Close describes as a good thing.
“This number is comfortable for the existing infrastructure and builds a solid base for us to see expansion on the next up cycle,” he explains.
“The greatest concern for producers today is the calf market this fall,” says Close.
“We are having difficulty clearing cattle from feed yards, and this creates pen space problems when adding feeder cattle,” Close explains.
If the backlog of feeder cattle continues through the summer, Close describes the calf market will be vulnerable in the late summer into the fall expecting numbers around the 150 to 160 million head level.
Close also warns that producers must continue to consider the escalation of the drought in the West.
“I do not believe we are to the point where the drought will cause heavy liquidation of cattle yet,” he says. “However, this is something producers should keep an eye on going forward.”
Feeder cattle
As far as feeder cattle are concerned, the stay-at-home orders and the closure of restaurants around the country sparked retail markets as meat sales at grocery stores increased.
Increases in the number of COVID-19 cases seen at packing plants caused severe slowdowns and closures, which put pressure on the market, according to Close.
“The $1.15 prices we saw in the April 15 market were due to fear of the unknown,” he explains.
However, Close also argues the feeder market made its comeback with too much, too quickly. He adds producers could soon see the feeder cattle market flatten and resume normal ranges.
“Fed cattle cleanup should support better feeder prices than forecasted,” Close claims.
While slaughter is down, carcass weights have increased, according to Close.
“The backlog of cattle with additional days on feed has increased the current carcass weights of feeder cattle by an additional 50 pounds over carcass weights from a year ago,” he explains.
Markets moving forward
“In all of the years I’ve been involved in the market, I have never seen a disruption in slaughter to this magnitude,” says Close. “Currently, slaughter numbers sit 40 percent below last year at this time.”
Although, capacity is back to 95 percent to 96 percent of this time last year, a feat Close shares is nothing short of amazing.
“Getting to 100 percent capacity will be the toughest part,” he adds.
Optimistic from 2019 trade deals, even with COVID-19 in the mix, Close believes better opportunities for feeder cattle will exist as the summer progresses.
“Our expectation at this point in time is to see the lowest price level at late summer into August,” says Close. “With the majority of sales in retail, the markets could take something below the two dollar mark to stabilize.”
Although there are uncertain times ahead for the beef market, Close explains there may be a silver lining.
“Consumers conditioned to higher prices enable the market to be at retail prices higher than we have seen historically,” Close concludes.
Navigating risk
“The cattle industry on its best day has lots of challenges,” says Peel.
He continues, “Its not going to be the kind of year we thought it was when it started.”
Peel provides explanations of different kinds of risk potentials and how to manage to decrease uncertainty. Price and production risk are areas where management is key.
“Price risk separates the three components of marketing – establishing price, changing ownership and transferring property,” according to Peel.
Managing one or all three components can help mitigate losses.
“Cash sales provide no opportunity for price risk management,” says Peel. “The price at an auction is established at the same time as ownership change and product transfer.”
Peel continues, “Forward selling options such as video sales and forward contracting involve lower price risk, but hold performance risk.”
He recommends a strong contract and a down payment to lower liability and risk of contract default.
Indirect price risk management, including futures and hedging options also limits price risk, according to Peel.
“Futures trade large market risk for a smaller basis risk,” Peel explains. “However, it is limited for marketing calves because futures contracts are defined for feeder cattle.”
“The option of retained ownership also decreases risk because it allows more market flexibility,” says Peel. “It changes what you are marketing.”
Head start recommended
Peel explains the first step producers can make to manage risk is to start planning early, especially when drought planning is thrown into the situation.
“Changes to consider for the operation include buying feed or forage, relocating animals, early weaning or backgrounding, and lastly, liquidating animals,” says Peel.
When planning, Peel recommends considering long-term impacts on both the forage resources and the animals.
“It is important to maintain the supply and demand balance in the operation,” he says.
Conclusions
“Producers have been playing good defense for the unprecedented situation,” Peel explains.
“The long-term prospects for the industry are strong and demand is strong, but masked by the current situation,” Peel continues.
He recommends planning and managing in a way that puts an operation in a situation to capitalize on emerging opportunity, which he predicts there will be no shortage of.
“Volatility always creates opportunity as well as challenges,” says Peel.
Averi Reynolds is the editor for the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.
