Beef Market Advisor

Thursday, October 18, 2001

Making Cent$ Out Of Today’s Cattle Market

Beef cow producers are facing more market price uncertainty now than at any time that I can remember in my thirty-plus year career. The National economy is apparently going into a recession and the world economy has also slowed down.

Beef exports are down in year 2001. Japan, our biggest beef export customer, is in a pro-longed recession. South Korea has back off on its beef imports from the U.S. Deteriorating macroeconomic conditions (U.S. and worldwide) and the added uncertainty from terrorist attacks on the U.S., cloud the beef demand picture and the cattle price outlook.

In the last recession, beef demand held up fairly well as long as people were employed; however, I watched unemployment as a beef demand indicator. As unemployment went up, beef demand went down. I argue that people prefer to eat beef as long as a paycheck is coming in. Once they are unemployed, they cut down on beef consumption to one or two days a week or cut beef out of their diet completely and move on down the meat counter to the lower priced meats.

The current drop in feeder calf prices:
Several things are impacting calf prices in the U.S. (and I believe Canada) besides the Terrorist attacks. Let me summarize and then let's look at some management strategies.
1. Canada and U.S. carcass weights are at an all time record. This is the same as adding 1000's of cattle to the beef supply.
a. Example: Add 10 lbs to slaughter weights. With 650,000 head slaughtered a week that comes to 6,500,000 extra pounds. Assume a 1250 pound average slaughter weight and the added 10 pounds is the same as adding 5,200 head of slaughter cattle per week.
b. Beef supply, however, is projected to drop off dramatically in 2002 and 2003.
i. When heifers are diverted from the feedlots to breeding herds, beef supply will drop.
2. Beef exports have been down for the total year. Japan, our biggest customer, is in an economic recession. Beef exports to South Korea are also down dramatically.
3. The terrorist attacks has reduced travel and restaurant eating out. Restaurant beef is high valued beef so the total value of carcasses is down. Grinding more and more meat into hamburger drags the total carcass value down.
4. Cattle feeders have been losing money for several months because they over bid the price of feeder cattle.
5. Large numbers of cattle are on feed. Many went on feed early due to drought in U.S. and I suspect in Western Canada.
a. The good news here is that many of these are "calf feds" that will take more days to finish so they will not come to market for a while.

Now for my marketing recommendations

Marketing 2001 Calves:
In response to a ranch family’s email question where the family normally markets their calves at weaning:
I advised them to hold onto their calves and to market them after the first of the year. I expect feeder cattle prices to recover by or before the first of the year. My current budgets for marketing 2001 calves as feeders after the 1st of the year suggests a potential of $20-$40 additional profit by backgrounding
and selling the calves as 800 pound feeders.
I see that Canada prices are even weaker right now so the profit potential for Canadian beef cow producers selling after the first of the year should be even more.
If you decide to background your 2001 calves until after Jan 1, 2002, I would suggest that you also consider some price risk protection. You can do this through the U.S. Futures market.
The Futures and Options Market was designed as risk management tools. I would recommend that ranchers take some price protection through the Options Market against a serious beef market down turn. That is, I would suggest buying an Out Of The Money Option Put to place a floor on feeder cattle prices after the 1st of the year; however, I would suggest that one spend no more than $1 or $2 per cwt for this floor price. Buy as high of a price floor as that money would buy.

Marketing 2002 calves:
In response to a producer’s email question asking about the need for risk management protection for his 2002 calves:
The world situation is adding considerable uncertainty and price risk to cattle marketings. My current thinking about taking risk protection of next Fall's calf crop (your 2002 calves) is that it may well be very appropriate. While our current projections are for favorable calf prices to last into year 2004, there certainly has to be considerable risk in today's market -- more so
than any time that I can remember. I think the food chain is a prime candidate for terrorist-induced problems. Animal agriculture, it seems to me, is even more prime than crop agriculture.
I am encouraging producers to think about some price risk protection just in case bio-terrorism hits the food system. I am suggesting that beef cow producers consider spending $1 to $2 per cwt to buy price risk protection for their 2002 calves. I then hope that you do not collect on the
price protection because market price was well above your price floor. Yet, having a floor may be very prudent management.
The problem is that the Options Market does not go out into the future far enough. This leaves the Feeder Cattle Futures as the next best choice for risk management on your 2002 calves. Again, I recommend spending no more than $1 to $2 per cwt for price protection. That may not allow you to cover all of your production but buy what you can with that kind of money outlay.

Drought Area Producer Should Hold Beef Cows at almost any cost:
In response to a Western U.S. Rancher asking if he should keep his cows in the drought or sell like most of his neighbors:
I think you are wise in holding your cow herd together even at an added costs. When those that sold down try to buy back as the normal weather returns, bred animal prices will be high. They will have sold low and bought high.

Don't forget that cows do not need to live on hay (or grass) alone. They can eat cheap grains, by-products, straw, etc if it is fed in balanced rations. I believe that you can cut down on expensive hay consumption by looking into alternative feeds.

Harlan Hughes
Professor Emeritus
North Dakota State University

Western Edge Consulting
30 Ramble A Road
Laramie, Wy 82070

phone: 701-238-9607

posted by Dr. Harlan Hughes 10:17 AM [edit]

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