At the risk of popping any New Year's balloons still hanging and hiding, the year just past will enter history as a lousy one for the cattle industry, especially for cow-calf producers and cattle feeders.
“In fact, 2008 will go down as the worst year ever for cattle feeding and the worst in 10 years for cow-calf operations,” said analysts with the Livestock Marketing Information Center (LMIC) in mid-December. They explain that annualized estimated cattle feeding returns for the Southern Plains were the lowest since LMIC began the calculations in the early 1970's. The calculation includes all costs of finishing a 750 lbs. steer in a commercial feedlot. By that measure, steer losses were about $120 per head last year on average. The previous worst annual average loss was $45 per head (steers) in 2006.
“Estimated cattle feeding returns have been negative for every month since May 2007,” say the folks at LMIC. “Those losses are why recent large declines in corn prices, and hence cost of feedlot gain, have not supported calf and yearling prices.” Steer calf prices (550-600 lbs.—basis Southern Plains) in the fall quarter were the lowest since 2002.
Moreover, LMIC estimates peg average cow costs $150 per head higher last year than in 2003, in the Southern Plains. “So, for the first time in 10 years, estimated returns in the Southern Plains did not cover cash costs of production (losses of $25-$30 per cow),” say LMIC analysts.
More broadly, according to the Economic Research Service (ERS) average net cash income for beef cattle operations was 17 percent less in 2008 than 2007, although cash receipts were three percent higher. ERS pegs cash expenses at 11 percent higher last year, led by fertilizer (+52 percent), fuel (+34 percent) and feed (+24 percent).
“Our cow-calf producers are really struggling, which means all of the rest of us have to deal with those consequences,” says Mike Miller, Chief Operating Office of Cattle-Fax. He was speaking at the recent BEEF Quality Summit in Colorado Springs.
According to Miller, a perfect storm of economic forces—mostly beyond producer control—erased the $25 per head average profit for cow-calf producers projected earlier in the year.
In round numbers, Miller says as recently as two years ago the total system breakeven was $65-$70/cwt. The system here is defined as cow-calf costs, plus the cost of putting 200 lbs. on the calf after weaning, plus the cost of putting the final 550 lbs. on in the feedlot. At that level and time, Miller says that meant there was about $350 profit in the system for the various sectors to divvy up. Now, the system breakeven is at least $90/cwt. (at least $10/cwt. more for Natural programs), and there's no profit left to share.
Spun differently, in order to offset the increased costs to the system, fed cattle would have to be averaging about $122/cwt., which is obviously a long ride from their current levels in the low $90's. Retail prices would have to increase 20 percent on top of the significant increases that have already taken place.
Non-fundamentals are driving the Market
Among the variables that make any reasonable assumptions about markets in the new year impossible are the recession gripping the nation and the fact that the market continues to be divorced from supply and demand fundamentals.
Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas spoke to the former at November's annual meeting of the Texas Cattle Feeders Association. He explained the Federal Reserve has been neither scanty nor slow in using every tool available to them to lend money and help keep the economy chugging. In addition to such measures as accepting new forms of collateral and expanding access to securities dealers, Fisher explains the Federal Reserve is also helping 14 federal banks from around the world meet dollar-funding needs.
But, no one has any solid ideas on how long the recession will last, and that has everything to do with the divergence of commodity prices from fundamental realities, which serve as both a cause and effect of the current fiasco.
In simple terms, the true value of corn resides somewhere between the $8 it was fetching in the summer and the $4 it was bringing the end of November, as one example, Presumably, the actual value of crude oil lies somewhere between oil at $140 during the summer and sub-$50 by the first of December. But, who knows?
Derrell Peel, a livestock marketing specialist at Oklahoma State University has done as well as anyone in describing why the cattle markets seem to make so little sense these days. In December he explained, “Cattle markets generally appear to be caught up in a wave of uncertainty and hesitancy, largely rooted in the weak macroeconomic situation. Additionally, many market players are operating hand to mouth with the result that markets are exhibiting week-to-week volatility or noise that simply cannot be explained or anticipated.”
As one example, Peel noted, “Boxed beef prices dropped sharply late in the week (first week of December) after a sizable rally the last month. The boxed beef rally was likely based on seasonal demand for middle meats going into the holiday period, which appears to be over now and retailers are back to buying hand to mouth once again. The boxed beef rally seemed inconsistent with the concurrent weakness in pork and poultry product prices.”
There was a week in mid-November, alone when the auction value of weaned calves lost a smooth 10 percent.
“What's worse, fed cattle prices weakened at the same time that boxed beef prices were improving,” Peel explained. “This apparent inconsistency was due to the fact the weakening by-product values took about $3/cwt. off of fed cattle prices and more than offset any strength coming from higher boxed beef prices. Feeder prices have continued to weaken despite lower corn prices, another apparent inconsistency. Feedlots have continued to lose enormous amounts of money and that is the overriding factor in weak feeder cattle demand. Live and Feeder cattle futures continue to unravel and appear to be disconnected with most everything at this time.”
So, if anyone tells you they've got it all figured out, don't believe them.
The uncertainty of the price environment, coupled with the certainty of last year's losses are behind the fact that both beef cow and beef heifer slaughter continue to run heavier, making for continued cow liquidation.
In the meantime, the aspects mentioned earlier by Peel mean that price volatility will likely continue to be the order of the day. Even as the industry seeks to understand the unknowable, there are already lessons worth carrying forward.
“First, don't waste time trying to analyze or anticipate weekly volatility that cannot be explained,” says Peel. “Maintaining flexibility in buying and selling and trying to average over several weeks can help reduce the volatility.
“Secondly, markets seem to be sluggish in correcting mixed fundamentals as a result of being caught up in the emotional turmoil of markets, but the corrections will occur.
“Finally, market fundamentals are still important and will provide the foundation for markets into 2009. However, there will continue to be lots of noise in markets for the foreseeable future.”