Stu Ellis, FarmGate
If you are raising cattle, you are involved in one of many dynamics currently underway in the beef industry. Fewer head, more headed to feedlots, and more being shipped overseas. The industry is having difficulty with its identity. It certainly wants to be profitable, but how does it do that in the wake of the dynamics that are pushing and pulling?
The recent October
Cattle on Feed report indicated that feedlots grew by 4.9% after deducting the marketings during September and the number of cattle entering feedlots. While that may seem bearish, the two futures trading sessions following the release of the report went in different directions. On Monday, prices headed higher, outweighing concerns that recent high prices for cattle futures aren’t justified by beef-demand fundamentals. But on Tuesday, futures fell with profit taking, as some traders continue to remain cautious that underlying fundamentals might not support historically high prices.
Last Friday’s CoF report was expected to show placements down by 3.5%, but they were up by 0.2%. Not much, but certainly a different direction than expected. Cattle of all sizes and shapes continue to move out of the
drought-impacted area, which is centered on Texas and radiates out to all contiguous states.
The continuing liquidation has now reduced the US beef herd by 12% from the latest bump in 2007, says Purdue economist Chris Hurt. Much has been written about the impact of the drought on the southwest livestock industry, as numbers of cattle keep dropping. The two dynamics involved are the high price of feed due to commodity demand, and the shortage of forage. Both are forcing cowboys to take action whether they want to or whether they can afford to do so.
Purdue economist
Chris Hurt calculates that the scarcity of forage, whether pastures or bales, has pushed prices above the cost of corn, and feedlot numbers are growing because corn is cheaper than grass. With corn prices falling during most of September, many more bushels of corn were pumped through cattle than forage. With a 14% increase in the number of lightweight animals entering feedlots, they will be there longer than usual as operators are counting on finding more corn and DDGS around than grass.
In his opinion, Hurt says the cattle market is being driven by:
1) The anticipation of very limited 2012 domestic beef supplies;
2) Foreign buyers of US beef who are willing to pay the high prices; and
3) A more optimistic tone for the world economy.
Regarding the dynamic involving exports, Hurt says, “Foreign markets are buying a record amount of beef at record high prices. USDA now expects a record 2.7 billion pounds of beef to be exported this year, representing a record ten percent of domestic production. A new record is expected to be set next year with 11% of production moving to foreign consumers.” That compares to only 5% in 2007. (In a related note, the pork industry is also expecting a record amount of pork being exported when the books are closed on 2011.)
Continued foreign demand for US beef will create a strong demand and keep bids high. While the recently implemented South Korean trade agreement will not have an immediate impact, the Koreans and other Asian consumers have been strong fans of the US beef. The strength of their economies will help support that demand, and the price of beef.
What the cowboys and pork producers will have to watch in coming months is the amount of grain being fed. If there is more corn fed than USDA’s numbers predict, then usage will grow faster than expected, and corn prices will gain upward momentum. And higher prices will not only change the dynamics on pork expansion, but also on financial strategies around cattle feedlots.
Summary:
An increasing number of cattle continue to enter feedlots, pushed by shortages and high prices of forage, and the relatively economical price of corn. A substantial amount of cattle being marketed is diverted to the export market, which has remained a strong bidder and kept prices high in the wake of listless domestic prices.
Source:
FarmGateBlog