KAY’S korner

Cattle Market & Farm Reports, Editorials
Dec 2, 2008
KAY’S kornerProducers face tough winter

Many cattle producers face a tough win- ter. The outlook has little to do with the physical climate, but the economic climate that has already erased trillions of dollars from the stock market. Wall Street’s woes continue to dominate the headlines and determine the direction of the cattle markets. About the only good news for the beef industry is that domestic beef sales are holding up well, notably in grocery stores. But exports have sharply declined, adding to concerns about prospects for 2009.

The week before last week was another example of the credit crisis overwhelming the cattle markets. Investors fled the stock market, driven by worries that the recession will be even more severe if the Big Three automakers don’t get help soon. This and concerns about rising borrowers’ defaults forced the Dow Jones Industrial Index below 8,000 points for the first time since March 31, 2003. It fell even harder the next day as Congress delayed a decision about an auto bailout. It closed at 7,552 points, its lowest level since October 2002 and 52 percent off its peak last year.

The first-day plunge pushed live cattle futures down between 245 points and their 300-point daily limit. That was after sharp declines the previous two days. So the December contract fell 585 points in just three days. It also meant it had lost $30.35, or 26.5 percent of its value, since its high on June 27. The impact on the cash live cattle market was more heartache for cattle feeders. Those in Nebraska and Iowa started selling first, accepting prices $3-4 per cwt. lower than the week before. The next day, cattle feeders in Kansas and Texas threw in the towel and sold cattle at $87 per cwt., a full $6 lower than the week before. That was the biggest week-to-week decline in grain-fed cattle prices since the discovery of the U.S.’s first bovine spongiform encephalopathy (BSE) case in December 2003. To add insult to injury, part of the weakness in the futures market was attributed to unfounded rumors about a new BSE case in Texas and a Texas woman possibly suffering from the human form of BSE. The excellent basis (the large discount of futures to cash prices) encouraged cattle feeders with hedged cattle to sell aggressively.

But that left those with unhedged cattle facing severe losses. Cattle feeders face some of the highest breakevens of the year in cattle currently being marketed.

But instead of a cash market that by now was expected to be in the mid- to high-$90s, prices have fallen dramatically. Cattle feeding losses reached $173 per head in October, their largest-ever monthly loss, says the Livestock Marketing Information Center (LMIC). There won’t be a month this year of positive margins. So the annual loss will be $113 per head, by far the largest since LMIC began calculating cattle feeding margins in 1975, says director Jim Robb. The next largest annual loss was in 2006 when losses averaged $75 per head. Cattle feeders who hedged cattle last summer could lock in profits.

But Robb believes there were a lot of unhedged cattle and cattle not forward contracted to packers. The feeding losses have put severe pressure on the price of young cattle waiting to be placed in feedlots. According to Robb, a lot of feeder cattle buyers are simply not buying right now. So feedlot placements are likely to remain below year ago levels for several more months. Tight market-ready supplies and a lack of forward contracted cattle could help cash live cattle prices recover sharply in the first quarter of 2009. But it could lead to a bunching of placements of heavyweight cattle in the first quarter, which would then impact the summer market.

One immediate impact is that producers are asking more about retaining ownership through the feeding stage than at any time in his career, says Robb. These producers would normally sell their cattle at weaning or as older animals. But prices for young cattle have declined sharply in the past two weeks. Prices were still high in September, but they unraveled in mid-October, recovered, but then slid again. With a lot of producers deciding to over-winter their cattle instead of sending them to a feedlot, there’s going to be a scramble for forage supplies, says Robb. Already, wheat grazeout programs are being reinstated as part of the search for winter forage.

Not surprisingly, feedlot occupancy is way down. The latest Cattle on Feed report showed the Nov. 1 inventory down nearly 7 percent from last year. Feedlots have now placed fewer cattle than in 2007 for eight months in a row, apart from July. The year-on-year decline for August-October was 479,000 head. This could mean tighter than expected supplies of market-ready cattle in the first quarter and into the second quarter. But the cattle outside feedlots will eventually go on feed. So producers will be hoping for an improvement in the economic outlook and less volatility in the stock market. Otherwise, they might be forced to sell their young cattle even cheaper than they are right now. They’ll also be hoping for a mild winter.

Steve Kay (Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.