HUNTIN' DAYLIGHT -- RISK INCREASES WITH OPPORTUNITY

by: Wes Ishmael

A day like the one in cattle markets March 31 is the kind you live for, the kind that needs to be etched in the mind for future reference when prices go south just as fast.

Cash fed cattle sales broke open with a vengeance that day, with live sales trading $6-$9 higher than a week earlier at $120-$125. Dressed sales were $9-$15 higher at $191.50 to $200. The next day, Live Cattle futures charged ahead triple-digits, leading Feeder Futures about a half-buck higher.

All of that occurred as Wall Street moved sideways to lower, oil prices reached their highest point in a couple of years, and corn prices moved up the limit and near limit-up.

Even though cash fed prices dropped back $2-$4 the next week at around $123, they were still selling at a $4 premium to the April futures contract.

As Emmit Rawls, agricultural economist at the University of Tennessee noted in the weekly Tennessee Market Highlights the week of April 8, “…The primary theory on the live cattle side is that higher corn prices will limit feedlot supplies in the future; while this has been the theory for some time we have not seen feedlot supplies tighten quite as much as possibly expected. Feedlots are very current right now in their supplies with some reporting selling next week's offerings this week at the record prices. On the feeder cattle side, as always, higher corn means higher cost of gains which means even tighter margins for feedlots.”

All of that bullishness transferred to auction markets up and down the High Plains during the first full week of April as feeder cattle sold steady to $3 higher; with more demand for feeders than calves and stockers for the first time since winter storms. Lighter weight cattle lost some luster with little time for backgrounding before turn-out on some the nation's leading summer pasture in the Osage country of Oklahoma and Kansas Flint Hills.

“Tight supplies may have driven feeder cattle to their present record levels, but demand is more responsible for the historic advances in the finished market,” explained analysts with the Agricultural Marketing Service (AMS). “Year-to-date, cattle slaughter is actually 0.5 percent higher than last year and 1.7 percent more than the five-year average.

“Through the first quarter, US beef exports are 50 percent larger than last year with the lion's share of the additional sales going to South Korea. Beef cow slaughter was still 0.5 percent larger than the five-year average through the first quarter, even though inventories are the smallest in 60 years, leaving market watchers to wonder what fat cattle price levels could be when these tight numbers of calves make their way to the show list.”

No one's rushing to expand

Indeed, as mentioned in this column previously, and across the industry, these heady cattle prices don't necessarily translate into stout profits as input costs continue their steep climb. That includes the cost and availability of credit that is becoming more of a barrier of participation for some.

In fact, the 2011 economic baseline from the University of Missouri Food and Agricultural Policy Institute (FAPRI-MU) pegs the trough for the current cattle cycle at 30.3 million beef cows in 2013 and then growing to 31.9 million head by 2020; that's one million more than began 2011. FAPRI-MU provides analysis of markets and policies for Congress and other decision makers. The annual report presents a summary of 10-year baseline projections for US agricultural and bio-fuel markets.

The baseline projects an average price of $119.88 for steers (basis Oklahoma 600-650 lbs.), growing to an average of $135.24 in 2014, and then declining to $127.62 by 2020.

FAPRI-MU projections call for fed steers (5-area direct) to average $105.67 this year; growing to $110.54 in 2014, then declining to $105.73 by 2020.

Among the projections in the FAPRI U.S. Baseline Briefing Book:

•      Recent beef cow herd data suggests that it will likely take quite a few years for the production declines to come to an end.

•      Beef production will be at its lowest level this year since 2005.

•      Beef exports are nearly 1.5 billion lbs. higher than five years ago. The combination of more international demand for U.S. beef and less beef production has curtailed the amount of beef available for domestic consumers.

•      Although crop prices are likely to fall back from the levels prevailing in early 2011, strong international demand for food and fiber and domestic demand for bio-fuels may keep prices well above pre-2007 levels.

•      After two years of very subdued U.S, food price inflation, food prices may increase by more than four percent in 2011. Projected food price inflation drops back to levels consistent with the overall rate of inflation after 2012.

•      The US dollar is expected to remain weak in the next decade, aiding the competitiveness of U.S. products overseas.

So, it's going to be awfully tough to dilute the impact that short cattle and beef supplies are having and will have on cattle and beef prices in the short and medium term. A double-dip recession, government intervention in beef prices (remember the 1970's) or some kind of cataclysmic event are always long-shot possibilities.

Instead, it seems like the primary risk continues to revolve around the industry's infrastructure which continues to narrow as beef cow numbers decline.

Consider the reports that Canada-based XL Foods will permanently shutter its beef packing facility in Nampa, Idaho. Reportedly that same company—with other packing facilities in Canada and the U.S.—will also close its Calgary packing plant, at least temporarily.

The impact will weigh most on producers locally and regionally, as well as the plant workers themselves. But, it speaks to the bigger issues faced by an industry with too much feeding capacity and packing capacity for the cattle it currently produces. It speaks to regional shifts in cow-calf production making it more difficult for producers in some parts of the country to access essential services, be it hauling cattle, veterinary care and what have you.

While the markets lead the sorting through of those kinds of issues, it seems like the keenest risk stems from the potential government policy.

Industry producers and a beef packer offered testimony April 6, before the House Agriculture Committee's Subcommittee on Livestock, Dairy and Poultry.

Among them was Ken Bull, vice president of cattle procurement for Cargill. He explained domestic and global beef demand growth offers plenty of opportunity to U.S. Cattle producers. He believes the opportunity for the domestic beef industry to capitalize on it revolves around efficiency, quality and consistency, as well as trade.

“All three of these themes have a common link-it is the critical relationship between the rancher, feeder, and the packer,” Bull said. “In order to find success, we have to bring the links closer together, not farther apart as some would like to see.”

Specifically, Bull explained the proposed GIPSA rule that would dilute or in effect prohibit the use of Alternative Marketing Arrangements (AMAs) represents the single greatest policy threat to the U.S. beef industry that he has seen during his 32-year professional career.

“One of the most critical (aspects of the proposed rule) is a concept that would make it easier for parties to sue packers for price discrimination and jury-awarded damages in federal courts,” Bull explained. “This exact proposal has been ruled against by eight different federal appellate courts, and even considered for hearing by the Supreme Court – and rejected. Any final rule that includes these provisions will be beyond chilling in the marketplace.

“This same kind of law passed in the state of Missouri in the spring of 1999. Implemented May 29, 2001, the impact on producers was immediate and severe as packers overnight shifted to purchasing on only the most basic formulas – rather than value-added or premium programs. The law remained in effect for four short months until the legislature repealed it in a special legislative session. Some of the implications of the GIPSA proposal are virtually identical to the provisions of the Missouri law.”

Along the way, there's no question industry dynamics are shifting with what appear to be permanently high input costs.

“Producer profitability will determine the amount of protein available to be consumed in the future,” said Jim Lochner, chief operating officer of Tyson Foods, Inc. at April's J.P.Morgan Global Protein Conference. “That concept hasn't changed; however, the drivers of profitability and production have changed.

“The old paradigm was that profitability and production are driven by domestic demand. The new paradigm is that they're largely driven by grain costs and exports.”

Lochner pointed out this shift in input costs began in the mid 2000s, which coincides with the U.S. government's mandate that a portion of the nation's gasoline be mixed with ethanol at a level of 10 percent. Today, about 40 percent of the U.S. corn crop is used in ethanol production. Lochner added that high input costs, along with increasing global demand for protein, have reduced the amount of meat and poultry available, resulting in higher protein prices for consumers, he added.

“Total production of major proteins appears to be about flat versus last year, but with extremely strong exports, it's likely there will be even less meat and poultry per capita,” Lochner said.







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