Nov 18, 2011

Repeating history

The cattle markets had a pretty good rally two weeks ago with cash fed cattle going over $125 live and

$202 dressed. We’re seeing the highest cash cattle and beef markets in history. However, the nation’s beef packers are between a rock and a hard spot, and feeders are too, but many feeders have a chance to make a few bucks at these levels. Feedstuffs remain very high, providing razor thin margins. I’d say right now, cattle performance is everything.

The beef cutout has been awful strong for quite some time and these markets just seem to get a little higher all the time. Who would have ever thought that the cattle industry would be selling fed steers and heifers for $125 and having a hard time making it work?

We keep hearing all this economic news about how bad the economy is and Europe’s financial mess, but when you look around, folks are still spending on traveling and, of course, buying beef at a decent rate. However, retailers have yet to pass on their real cost of most meats.

Beef production is continuing to decline and the old supply/demand markets always work the way they should. With price levels going higher, I’m hearing more cattlemen are wondering when the other shoe is going to drop and these markets hit the deck.

Frankly, I don’t see it happening; domestic and foreign beef supplies are going to be smaller for a while.

The beef industry would like to expand, but the current feed resources won’t allow it. The cattle just aren’t there to feed this global demand for beef.

I had a gut feeling we could see some herds grow this past year, but the dry weather in the southern Plains put an end to that idea. It will rain again, and then I would have to think that cattlemen will have all the incentive they will need to expand herds.

And some good quality replacement heifers are trading well over $1,500 per head in the northern states, where they have had ample forage supplies. With a $120 fed cattle market, those prices for replacement females all of a sudden appear reasonable. Seasonal cow slaughter has slowed and we should expect to see slaughter cow prices go much higher this winter and spring. There is just too much global demand for beef and pork.

Market analysts have said that it will take a beef cutout of $200 to sustain a fed cattle market in the $120s and it appears we are pretty close to having it. Last week, the composite cutout was at $184.33. We’re coming into Christmas and the new year when the demand for quality beef is generally stronger.

The folks at said last week that there is a huge disconnect between the current cash cattle price and retail beef prices. They said retail beef prices only reflect a live cash price of $111. Unless the consumer is willing to pay a lot more for beef, production levels will need to be reduced, and some of that is happening. They are suggesting that year-to-year gains in meat prices have peaked.

The way I see it, there are only two things that can happen: cattle prices go lower or consumers start spending more for beef. And we certainly don’t want to see cattle prices go lower and provide cattle feeders a long period of negative returns.

We’re constantly told by the national news that consumers are tapped out on spending, but then we turn around and see forecasts that consumers are planning on spending 3 to 4 percent more on Christmas gift giving. So which is it?

The only justification I can think of for consumers to spend more on beef is that the U.S. economy is still the largest economy in the world and we’re meat eaters. The price of food in the U.S. is rising dramatically, but it’s still about 10 percent of our disposable income. Nearly everywhere else in the world, people spend 25 percent or more of their disposable income on food. There is not a lot of justification to say that food is too expensive from that perspective.

Ironically, I was reading one of Nelson Crow’s columns in a 1948 issue of Western Livestock Journal.

He was discussing the rapid inflation of meat prices after World War II. Cattle numbers had dropped 3 percent from year-to-year because of drought and low meat supplies. He was worried that consumers couldn’t pay the high prices of beef in those days, but they did.

It just shows us that the cattle and beef industry have been through similar market dynamics before and that markets can go higher. It always seems that we learn how to produce meat products a little better with fewer costs and I’m sure, as it typically does, history will repeat itself. — PETE CROW