Price Uncertainty Underscores Cattle Business Risk Through This Year

CattleYear-over-year prices for finished steers remain high, but it looks like in general, cattle futures have peaked for the season, and that’s likely to trim gains heading into summer. The cattle business has responded to supply-driven price movement and begun to trim the overall herd size. Although that’s fundamentally bullish, the industry looks to face a lot of uncertainty — and resulting price risk — in the next few months, says one economist.

Last year was a big one for all sectors of the livestock industry; high prices drove up production. As prices started to respond earlier this year, some sectors kept growing (maybe a good thing for the poultry industry battling bird flu-driven culls numbering in the millions right now). While overall herd numbers continue strong, beef producers have started tapering off production in the form of lower slaughter numbers, likely in an effort to retain more breeding stock. It’s a combination that may send production lower in the long-run, says Purdue University Extension livestock economist and cattle market expert Chris Hurt.

“In the first four months of this year, beef production was down by 5%, with slaughter numbers down 7% but market weights up 2%. The reduction is the result of a beef cowherd that had been in decline from 2006, reaching its low point in 2014. Expansion of the beef cowherd began in the last-half of 2014 and current indications are that the expansion continues. Producers can increase cow numbers both by retaining heifers and by keeping older cows for another cycle when they normally would have gone to market,” he says in his latest beef market analysis. “Slaughter of females so far this year indicate producers are doing both. Heifer slaughter last year was down 8%, and so far this year, heifer slaughter remains down 7%. Beef cow slaughter in 2014 was down 18% and remains down 17% so far this year. While these producer behaviors will build the beef cowherd and eventually increase beef production, the impact for this year is to pull down beef production.”

Alongside lower heifer slaughter numbers, retention is rising, recent USDA data show. And, more calves are being backgrounded right now because of high prices and improved forage conditions in regions like parts of the central and southern Plains, leading to heavier placements.

“The number of heifers in feedlots as of April 1 was down 10% from previous year levels, most likely confirming a high rate of heifer retention for herd expansion. Secondly, as a result of record-high calf prices and weak live cattle futures prices, fewer lightweight calves are moving to feedlots as producers keep those calves on forage diets and background them for longer,” Hurt says. “The number of calves under 700 pounds entering feedlots in March was down 11%, but the number over 800 pounds was up 16%. In fact, 40% of all placements in March were older calves that were 800 pounds and higher. Improved pasture conditions in the central and southern Plains provides some of the explanation, but there were also reports of calves staying on winter wheat pasture further into the spring this year.”

Taken all together, these dynamics make pegging price direction moving forward a tough task. On one hand, Hurt says the recent investment feeders in particular have put into the business in the last year or so make them susceptible to considerable losses if live cattle prices slump too hard. Whereas, if the market stays on solid ground — and Hurt says that’s just as likely as cash prices slipping in the near term — profits will stay intact. That puts a premium on managing inputs — namely feed prices — based on per-head budgets, not projected profit, especially with seedstock still well on the expensive side.

“The wide difference of opinions about cattle prices for the remainder of this year point out the large price risks for cattle finishers. Cattle feeders already have record amounts of money invested in the cattle in their feedlots. Even with the lowest feed prices in five years, they are vulnerable to weak live cattle prices as the futures market is currently suggesting. Feedlot managers should strive to price calves based on budgets using current futures prices and then should look to hedge those cattle with either futures or put options,” Hurt says. “If feedlot managers find themselves bidding so much for calves that they have to have a sizable rally in the live cattle futures to cover costs, they may want to rethink buying the calves in the first place.”

Jeff Caldwell    05/06/2015

Multimedia Editor for Agriculture.com and Successful Farming magazine.

Source: Agriculture.com

 

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