HUNTIN' DAYLIGHT -- THE MARKET: STAY TUNED
By: Wes Ishmael
"If
the market gives you an opportunity to lock in a profit, now is not the time
to be swinging for the fences," says Randy Blach, executive vice president of
Cattle-Fax.
He was offering that advice to stockers, but it underscores the volatility and
uncertainty of the markets in all segments, which Cattle-Fax outlined for
producers during its annual Outlook Forum during the National Cattlemen's
Beef Association meeting last week. To their credit, the Cattle-Fax crew
was willing to make some assumptions about the coming year, and make their
estimates based upon those assumptions so that producers could have a basis
for trying to sort out what is unknowable-the ultimate long term economic
impact of the BSE discovery in December. Overall, the tightest feeder cattle
and feeder calf numbers since the mid 1960's, along with continued growing
consumer demand are setting the stage for another profitable year in the
cow/calf sector, says Cattle-Fax. That's on top of the last three years,
which have also provided cow-calf producers with profit potential. That's
also despite the wrench that BSE and the loss of export markets has thrown
into the supply and demand fundamentals.
"I'm not sure we (the industry) know where the market is today," says Cattle-Fax
analyst, Kevin Good. Indeed, between the BSE announcement in December and
the end of January cash fed cattle prices have bounced between $75/cwt.
and $92/cwt. Futures contracts for live cattle and feeder cattle have represented
a similar gut-churning roller coaster ride. "Our best estimate is that the
market will get re-established in the lower 80's," says Good.
A year ago, that estimate would have met with cheers. Today, however, breakevens
are expected to rise into record high mid-80's this spring. And, as always,
with more room to fall, prices will likely continue to be more volatile.
Key Factors in 2003
Any way you slice it though, if BSE had to be discovered in the U.S., producers
couldn't have scripted a better time in history, relative to market fundamentals.
Cattle-Fax notes the following as key components to record high fed cattle,
wholesale and retail prices in 2003, especially during the second half of
last year.
* Per capita beef supplies-Last year they were the smallest
since the 1970's.
* Demand-Not only is it growing today, new levels of increased
consumer demand were recorded in every month of 2003-it has continued to
grow uninterrupted since it began increasing in 1999.
* Lower slaughter weights/less tonnage-Record slaughter
levels, spawned in part by the U.S. picking up the void left in the global export
market after the world closed its borders to Canada May 20-and before the world
shut out the U.S. December 23-left cattle feeders here more current than at
anytime in history. Aside from the market leverage this returned to cattle feeders
and producers overall, the fact cattle were being pulled onto the show lists
as fast as possible meant that average carcass weights for the year ended 18
lbs. lower than the previous year.
* Cattle numbers-Last year marked the seventh consecutive
year of declining total cattle numbers, down 7.4 million head from the current
cycle's high in 1996. According to Cattle-Fax analyst Dave Weaber, "Feeder
cattle and feeder calf supplies are the tightest since the mid 1960's."
* Only modest expansion-Although some states began expanding
cow numbers last year on a limited basis, due primarily to purchasing cows from
drought-stricken areas, Weaber explains continued dryness and expectations for
lingering and perhaps expanding drought likely mean true expansion will continue
to be delayed for another 12-24 months.
Things to Look For This Year
* More Beef Tonnage-With beef exports expected
to decline 66 percent this year compared to 2003, due to the countries rejecting
U.S. product on the basis of BSE, Cattle-Fax estimates an additional 45-48 million
pounds of beef each week that will need to find a market at home rather than
be exported. Blach says that's
equivalent to 60,000 head per week. Besides having to keep the product at home,
the U.S. is losing the opportunity to sell certain cuts for more money in other
countries than they fetch here. All told, exports have accounted for 9-10 percent
of annual domestic beef production the past few years and accounted for $14-$15/cwt.
in the price of fed cattle. Consequently, the timing of countries re-opening
their borders to U.S. beef will go a long way in determining ultimate price levels
this year. Cattle-Fax believes Mexico will re-open its borders to us within the
next several months. Mexico is the largest importer of U.S. beef on a tonnage
basis. Japan, which has been the largest importer of U.S. beef on a value basis
will certainly be later to re-open its borders, most likely not until late this
year. All of this is to say that domestic demand becomes even more crucial in
sustaining a positive pricing environment.
* Slaughter Levels-Already the fact that fewer cattle are
being harvested this year compared to last year's
average suggest that front-end supplies are building; cattle feeders are losing
some of the currentness they struggled to build, then hold especially toward
the end of last year. Kevin Good notes that every 10 million pounds of change
in slaughter levels between weeks creates a $2/cwt. change in the price of fed
cattle.
* More Meat Tonnage-We're tightening our supplies from
a cyclical standpoint, and our competition is expanding theirs," says Weaber.
He points out poultry and pork supplies are expected to be record large again
in 2004.
* Corn Prices-According to Bill Chandler, Cattle-Fax grain
analyst, "If demand for corn continues (unchanged from last year) we will
have to have a record large corn crop just to keep up."
Think in terms of meeting or exceeding last year's record U.S. corn crop
of 10.1 billion bushels. Although corn plantings are forecast to increase
over last year, global ending corn stocks are the lowest since the 1970's,
according to Chandler. U.S. stocks ended 2003 down 10 percent, and global stocks
ended 34 percent down. So, without a record corn crop, the stage is set for
corn prices to increase, which historically pressure fed cattle costs, which
in turn pressures prices paid for feeder cattle and calves.
* Volatility-Since July 15 the industry has seen fed cattle
prices increase $36/cwt. and decline 37$/cwt. That $73 trading range continues
to be reflected in the spread between asking and bidding prices each week-it's
been as high as $10, which is more spread than we see in some years.
Bottom Lines-Price
Estimates
With this outlook and the following assumptions, Cattle-Fax is calling for these
price ranges in 2004: Fed Cattle--$77-$78/cwt., assuming domestic beef consumption
remains strong even as pork and poultry production increases another one to two
percent; beef production will total 25.6 billion lb.; Mexican border re-opens
by March; Asian markets re-open by the middle of the year. Also assuming fed
cattle at $78/cwt. and corn at $2.60/bu: Feeder Cattle (750 lb.)--$88-$90/cwt.,
assuming feeder cattle and calf supplies are four percent lower January 1 than
a year ago; fewer placements for the first five months; Canadian border remains
closed to live cattle trade for most of the year; and prices remain in an up-trend,
which represents historically high levels. Feeder Calves (550 lb.)--$104-$107/cwt.,
assuming improved grazing prospects in the north, Mexican imports even with last
year or lower; Canadian border remains closed to live cattle trade through most
of the year; Corn prices remain below $3.00/bu (basis Omaha). Slaughter Cows--$47-$48/cwt.
Bred Cows--$50-$100 more than last year depending on moisture.
So, decades-tight supplies of feeder cattle and calves should place cow-calf
producers in a position to make a profit. Those same tight numbers and high prices
mean that cattle feeders will be near breakeven levels, according to Cattle-Fax,
compared to average profits of $148 per head last year. Even though domestic
beef production will decline in 2004, overall U.S. beef supplies per capita will
increase this year compared to last because of the product we can't export.
The wild cards include, moisture, re-opening of the world's border to U.S. beef,
re-opening of the Canadian border to live cattle trade, and demand, demand, demand...
"We have to plan for the worst and hope for the best,"says Blach. But
he adds there is something all producers can do to help themselves in times like
these: "You have to stay informed; things are changing very quickly."
