by: Wes Ishmael

Chance and human foible often make even rational assumptions a risky business. But, odds favor the following topics to be among the most heavily reported and discussed this year.

High Cattle Prices

There aren't any secrets to this, and there shouldn't be any surprises. More than a year ago a fair number of calf buyers were jockeying to figure out how they could buy calves earlier than normal because tight supplies foretold what has come to pass.

In December, a string of 3-weight steer calves—topnotch, all the bells and whistles—brought $200/cwt. at Pratt Livestock Auction in Kansas.

Part of that has to do with the contra-seasonal price rally that kicked in the middle of October. As Tim Petry, agricultural economist at North Dakota State University described in an issue of In the Markets last month:

“Corn futures prices staged a contra-seasonal fall rally until November, but then dropped almost a dollar per bushel. Although still at historic high levels, the corn price decline was supportive to calf prices especially when rumors of even higher corn prices had been surfacing. Spring live cattle futures prices rallied from about $100/cwt. in October to near $110 by the end of November. A robust export demand for beef and higher byproduct values helped fuel the rally. Higher futures prices allowed feedlots to be more aggressive buyers of the shorter supply of calves that were available. Higher corn prices this year reduced the spread between calf prices and the heavier weight feeder cattle, which favored stocker and backgrounding programs…”

That helped, obviously, but it boils down to so much capacity chasing so few cattle. Supplies will get even tighter when the industry finally decides to expand. Since high prices are not equivalent to profit, though, at best, cow numbers this year are likely to remain static.

Consumer Sticker Shock

With futures prices for Live Cattle at more than $100 across the board becoming the rule rather than the exception, retail margins are likely to decline, even as they increase the price tag for consumers. Through the third quarter of 2010 the All Fresh Beef Retail Value prices published by the USDA Economic Research Service promised a record high annual average.

In their December 17 CME Group Daily Livestock Report, Steve Meyer and Len Steiner say, “…The November Consumer Price Index was virtually unchanged from October and only 1.4% higher than one year ago. Measuring from last December, consumer prices have inflated by 1.3 percent this year in spite of the trillions of dollars of liquidity that have been added to the U.S. economy. Among the various categories that comprise the CPI, the largest year-on-year price increase is for meats at 7.6 percent...

“…The message is quite clear: Food prices have risen modestly but animal product prices have grown sharply in the past year. Those price increases were a logical result of the higher costs that producers have dealt with since 2007 and the resulting reductions in supply. It is important to note that lower beef supplies have not actually hit the market yet and the price impacts of a sharply reduced beef cow herd will not be seen until 2011 and 2012.”

Commodity Price Shock

One way or another, it's hard to bet against grain prices moving higher. It could be an extension of the ethanol incentives set to expire January 1, which Congress was still discussing in December when this column was being written. It could be broadening vehicle age for a higher inclusion rate of ethanol in gasoline, as the Environmental Protection Agency is expected to rule on later this month.

Maybe the shock is related to poor production in other parts of the world. And just maybe, the production problem occurs in this country. La Niña is brewing. According to the National Oceanic and Atmospheric Administration, La Niña conditions are expected to peak this winter and continue into the spring. Depending on the extent of it, La Niña conditions favor hotter, drier summers in the Midwest, supporting the likelihood of corn production below trend line yields. Already, the market is battling to buy more corn acres for spring planting.

Renewed Emphasis on Forage Gain

High calf prices and high feed costs mean forage gains are more valuable.

Speaking to the contra-seasonal rally in calf prices, Derrell Peel, extension livestock marketing specialist at Oklahoma State University pointed out last month, “Despite very high prices, especially for calves, the value of additional weight gain continues to be very strong, encouraging more weight gain outside of feedlots. This stocker value of gain only occurs at heavy feeder weights as there is a steep rollback in prices for feeders up to 600 lbs.”

Though the specifics—price slides between weights and whatnot—will ebb and flow, there's little reason to expect that fundamental opportunity to change much this year.

Better than expected Economic Growth

I'm enough of a contrarian and optimist to believe the national economic recovery will be stronger and quicker this year than many analysts suggest.

The unemployment rate looks to remain stubborn, and broad economic recovery thus far has been more anemic than hoped, but it seems like markets and the economy always have a threshold. Bad, or in this case good, once that unknowable threshold is breeched, look out.

Through the fourth quarter, investors were showing at least slightly more willingness to take more risk. Part of that has to do with the changing political landscape and what's perceived to be less uncertainty.

In October, improving same-store sales and customer traffic pumped the National Restaurant Association's (NRA) Restaurant Performance Index (RPI) to its highest level in more than three years.

The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.7 in October, up 0.4 percent from September and strongest level since September 2007. In addition, the RPI stood above 100 for the second consecutive month, which signifies expansion in the index of key industry indicators.

“In addition to improving current situation indicators, restaurant operators are increasingly optimistic about sales growth in the coming months, and also reported a positive outlook for staffing levels for the first time in six months,” said Hudson Riehle, senior vice president of the NRA Research and Knowledge Group.

Re-taking America

Maybe it was the merciless way voters hammered Congressional Democrats in November.

Maybe it was Agriculture Secretary Tom Vilsack finally acquiescing to conducting an economic impact study of what the controversial GIPSA rule could cost the industry—after three private industry studies found the rule would cost the cattle industry alone more than $1 billion.

Perhaps it was both the House and Senate voting to extend the Bush-era tax cuts for another two years, including those for the estate tax.

It could have been the court ruling that an integral part of the Health Care Reform law is in fact unconstitutional, as many have argued.

The American Center for Law and Justice (ACLJ), focusing on constitutional law, called the court's ruling a “decisive and significant victory for America.”

“We're very pleased the federal court reached a sound decision and concluded that the individual insurance mandate is an unconstitutional violation of the Commerce Clause,” said Jay Sekulow, Chief Counsel of the ACLJ. “This decision guts ObamaCare and represents a decisive and significant victory for America against the largest power-grab by the federal government in U.S. history. The court correctly concluded that forcing someone to buy health insurance is not economic activity and that Congress does not have that authority under the Commerce Clause…”

Based on these individual examples and taken together as a whole—they all occurred within about 60 days—you just get the sense that mainstream America is fed up enough to become engaged in the democratic process and reclaim some of the freedoms they've squandered.

Compared to a year ago, things are a lot brighter on the political front for the cattle business.

In December, Frank Lucas (R-OK) was confirmed as Chairman of the House Agriculture Committee. He's got roots in the business. His common sense approach and belief voters need to take back their country from the government came through loud and clear when I listened to him at a stocker conference a couple of years back.

Colin Woodall, Vice President of Government Affairs for the National Cattlemen's Beef Association had this to say:

“Under the leadership of Rep. Lucas, we expect the Environmental Protection Agency, USDA's Grain Inspection, Packers and Stockyards Administration and other departments within this administration to be held accountable for regulations that will stymie the success of innovative and creative cattle producers who are the very best stewards of the land.

“Rep. Lucas understands the importance of agriculture. He is aware of the unique challenges facing agriculture and is ready to pursue opportunities for the entire industry…”

Something no one can Predict

Every year, of course, there always seems to be something from out of the blue that no one could anticipate or time. Things like discovering of Bovine Spongiform Encepholopathy in the U.S. in 2003, the commodity bubble a couple of years ago, the Great Recession.

There's no reason to expect this year to be immune to such surprises.


Don't forget to BOOKMARK  
Cattle Today Online!