The action in live cattle last week set off alarm bells

2013-02-14T08:00:00Z The action in live cattle last week set off alarm bellsBY DENNIS SMITH Agri-View
February 14, 2013 8:00 am  • 

Three developments from last week surprised me and set off alarm bells of caution. First, futures pulled back and filled the gap left on the price charts from the bullish January cattle-on-feed report. I thought that these gaps would likely go into the spring season unfilled. The second development that surprised me was the fact that cash steer prices traded at steady money compared to the previous week instead of higher. And thirdly, the wholesale beef failed to show signs of a significant bottom.

In addition to the above three developments, the USDA surprised me with some of their meat production forecasts for this year. In their Feb 8 supply/demand report, they increased their projection for 2013 beef production, from their January forecast, by 290 million pounds. They increased their pork production projection by 140 million pounds and lastly they increased their broiler production estimate, from January, by 500 million pounds. This last figure, chicken production, indicates they believe that poultry production in 2013 will exceed that of 2012. The broiler industry had experienced a rare decline in production over the last two years in direct response to record high feed prices. The sharp increase in poultry production has a two-fold meaning. First, it indicates that chicken prices will start edging lower and become a tough competitor with both beef and pork for the consumer dollar. And second, it carries with it the implication that the USDA believes it’s highly likely that corn prices will move lower to substantially lower in the months ahead.

I’ve clearly been bullish toward live cattle futures and live cattle cash prices in my previous comments. Most of my bullish outlook has been focused on the projected sharp decline in beef production this year. Last fall most projections indicated beef production would decline in 2013 by 5 percent or more. Friday, the USDA indicated that beef production would decline by only about 3 percent. Basically, what they’re indicating is that cattle will be consistently fed to heavy weights during the course of the year. A consistent supply of heavy weight carcasses will take the edge off the bullish supply outlook for 2013. I’ve also been bullish from a demand standpoint. Admittedly, this has been a risky outlook with beef prices expensive and near record highs. Part of my reasoning was focused on the outlook for high pork and chicken prices in response to flat production in these two sectors. With the poultry industry moving into an expansionary mode and with the pork producers keeping breeding stock stable, it appears that both pork and poultry prices could weaken during the course of the year. If this is going to be the case, it will make moving beef at record high prices a difficult task.

The beef industry is currently caught between a rock and a hard place. Beef packers have been losing money processing cattle for months. At the same time, feedlots, or cattle producers have also been losing money on their closeouts for months. The cow calf operator, perhaps, has enjoyed some profitability. However, this end of the beef business has not been without its own set of troubles. A severe lack of adequate forage and pasture combined with two small hay crops, forcing hay prices to record highs, has forced break-even prices upward for the cow/calf guy. The beef industry has gone through a massive, long term liquidation phase. Large scale beef cow liquidation has whittled the calf crop down to a 61-year low. However, because of successful beef cattle genetics and vast improvements in feeding and feed conversion, total beef production has not dropped off as much as one would expect. I’m told that heavier beef carcass weights are here to stay.

There are several different ways for this situation to be rectified. One would be for average dressed weights to peak, forcing beef production down sharply, resulting in rising cash steer prices and rising wholesale beef prices. This scenario would be possible if it occurred in tandem with continued high feed input costs, flat to lower pork production and another round of lower poultry production. Recent data, however, indicates that pork production will be steady to slightly larger, poultry production is going to increase and corn prices could possibly move lower to sharply lower. Another way out would be if beef exports soared. However, currently the USDA is projecting beef exports for 2013 to remain flat to possibly even down slightly from last year.

It now appears the most likely scenario would involve corn prices moving lower to sharply lower. This would, eventually, lower break-even costs in the cattle industry. If this were to occur, at some point producers would be in a position to make money feeding cattle. In addition, packers, eventually, would be able to buy cattle cheap enough and turn around and offer beef at more attractive price levels befitting the U.S. consumer. Lower beef prices would likely spur additional beef exports. This scenario, unfortunately, involves a continuation of losses for a significant period of time.

Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance doesn’t indicate future results.

Dennis Smith has been a commodity broker for 26 years and works extensively with livestock and grain producers. Dennis publishes a highly respected and widely followed “daily livestock wire,” which is part of his brokerage services. A free 30-day trial to the livestock wire can be requested by emailing Dennis at dennis.smith@archerfinancials.com or calling 877-377-7905.

Copyright 2015 Agri-View. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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