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HUNTIN' DAYLIGHT -- MARKETS ARE MARKETS, THANKFULLY

by: Wes Ishmael

Understandably, when folks are making money, or at least have more breathing room because of price, there tends to be less attention paid to what some hoist up as the industry's perennial bogeymen whenever the markets are running the opposite direction.

Remember the emotional rhetoric about packer ownership the last couple of years? There's still discussion, perhaps even another legislative bill pending, but the notion that feeder cattle owned by packers—or even captive supplies—undermining the markets overall loses lots of steam when record prices are being paid for cattle. After all, how do you say the market is busted, with a straight face, when fed cattle bring over $100/cwt!

Likewise, even though the point is long past where argument is worth any of the gum flapping—it is a law already for Heaven's sake—it's awfully tough for proponents of the mandatory Country of Origin Labeling law (set to go into effect next September unless something changes) to argue that this mandate is necessary to increase consumer demand.

According to Randy Blach, Executive Vice-President of Cattle-Fax, speaking to members of the Texas Cattle Feeders Association (TCFA) at that group's annual meeting the end of October, “Prior to this year, demand growth had been worth about $100 per head to the value of fed cattle…In each month in 2003, we've seen record beef demand. That demand growth has been worth at least $200 per head on the value of fed cattle.” Spinning the wheels on a different scale, Blach said consumers are currently spending about $14 billion more on beef than they did in the 1990's, despite the fact that retail prices have risen during that same time. In other words, beef is experiencing true demand where more product is commanding a higher price.

That's happening, yet COOL has not gone into effect yet. Consequently, it's tough to argue consumers are clamoring for such information in order to make their buying decisions.

So, What's Changed?

The point is that the same market fundamentals making for a Price Valhalla, once confined only to the wildest of producer dreams, are the same ones that had cattle feeders losing equity hand-over-fist not long ago, exiting the business, and pressuring prices for calves and feeder cattle.

The fundamentals driving the cattle and beef marketplace are the same: supply and demand. What has changed over the past 18 months, as always happens, is merely the direction and the level of the fundamentals.

On the supply side, the expansion phase of the cattle cycle has yet to begin, delayed for a number of reasons, including the widespread drought. At the same time, May 20 changed global supplies when the world shut its trading borders to Canada for cattle and beef, in response to the discovery of a single case of BSE there. Suddenly, there were no live cattle coming south from Canada. More important, Canada's global import partners were scrambling to find product from other exporters, including, of course, from the United States.

Overall, Blach said between Australia's continued drought (they're another primary exporter to the U.S.) and Canada's BSE woes, U.S. beef imports this year are down 14 percent, while U.S. beef exports are up seven to eight percent. “Obviously, we'll see a continuation of trade with Canada sometime during the first half of next year. But, with no expansion taking place in the U.S. cattle herd, we'll still see a decline in available supplies,” explained Blach.

Incidentally, speaking at the same TCFA annual meeting, Chandler Keys vice president of the National Cattlemen's Beef Association, explained government is currently drafting a proposed rule for bringing live cattle less than 30 months of age into the U.S. from Canada. Supposedly, that rule is supposed to be issued soon. Issuing of the rule will be followed by a comment period of 60-90 days, followed by any necessary rule modification based on comments received. “So, we're looking at some time next year before we begin to see any movement,” says Keys.

Now, toss in the growing demand Blach explains and there has been a unique situation of the markets chasing its tail ever skyward: packers have been paying increasing prices for cattle, which have led feedlots to pull cattle forward to market ahead of projections, which means cattle are being marketed at lighter weights, thus taking increasing total tonnage off the market, tightening supplies further and so on.

Again, the direction and level of fundamentals have changed, but the same supply and demand basics making for the current historic market are the same ones that conspired to make for such dreadful markets not so long ago. Bottom line, left to its own devices, unfettered by legislation creating artificial movement, the market goes where it needs to go at any given time to balance the fundamentals. That's worth considering in times of plenty so that it's not as tempting to beg for government involvement when times get tough.

What Will Likely Change

Keep in mind, market legislation is quite different than accessory regulations, even mandates leveled at protecting the cattle industry's assets.

Mandatory National Animal Identification comes to mind. In early October the U.S. Animal Health Association (USAHA) overwhelmingly approved recommendations submitted to it for a mandatory program. The recommendations were submitted, at the request of USAHA from the National Animal Identification Development Team. This group includes a cross section of livestock producers, producer groups, animal health care providers, state and federal government officials, etc. The team was assembled at the behest of the USAHA, which is a key advising organization to government.

Specifically, the plan requested and delivered revolves around the sole, imperative purpose of disease surveillance enabling trace-back between animals suspected of harboring a Foreign Animal Disease (FAD) and all previous production locations, within 48 hours.

In a nutshell, the National Animal Identification Plan calls for:

• Premises ID required by July 1, 2004

• Animals moving in interstate commerce identified with official USAID individual or group/lot numbers by July 1, 2005 with, interstate movement of animals reported to the official database.

• Animals moving within intrastate commerce identified with official USAID individual or group/lot numbers by July 1, 2006, with intrastate movement of animals reported to the official database.

Although USAHA hopes the premises ID program can be implemented by next July, in approving the submitted recommendations, they requested the development team to revise and flesh out portions of the plan, which likely could delay the aggressive implementation schedule cited above. Most of the modifications USAHA has requested have to do with specific details of pan implementation at the state and federal level, along with incorporating more species-specific input into the plan.

It's a long ways and an estimated several hundred million dollars—the jury is still out on who foots the bill—between these approved recommendations and every head of livestock being identified and traceable within 48 hours. However, just a few years ago, few would have bet both need and consensus would be as far along as they are currently. You can find all of the specific recommendations at www.usaip.info.

So, with or without ID-related government mandated market-impacting regulations such as Country of Origin Labeling or market mandates such as the export certificates being required by trading partners, it appears all cattle producers will need to gear up to identify all of their stock and report both interstate and intrastate movements of them.

Again, regulations such as the proposed ID plan, which are aimed at defending and maintaining the resources of the industry need to be considered apart from market regulations that a law like mandatory national animal identification enables.

In the meantime, keep an eye on the fundamentals. Those tight supplies mentioned earlier will get tighter before they become more plentiful. Sooner or later herd expansion will begin again, meaning that more heifers will be retained for breeding and fewer cows will be shipped to town. That means for a time there will be even less tonnage to fill growing demand.

Although Blach believes the astronomic run-up in fed cattle prices this fall was likely an extreme, he noted at TCFA that fed cattle prices will likely average in the lower to mid 80's for 2003, ranging for the year from the mid 70's to the mid-90's. He explained, “And we'll continue to trade cattle at a high range in 2004 and likely into 2005.

“The market structure is still very positive. We've got a market that's built on a discount futures market, we've got a good swap on feeder cattle, even though we're buying the highest breakevens in history, and continued profits on fed cattle will encourage aggressive fed cattle marketings.”

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