Source: Chris Scott, Meatingplace.com, March 30
U.S. cattlemen can expect high cattle prices to continue through 2011, although higher feed costs will continue to impact profit margins, according to Glynn Tonsor, an agricultural economist and assistant professor at Kansas State University.
Tonsor notes that tight supplies and strong demand may have lifted cattle prices to record levels, but the livestock marketing specialist told Meatinglace that producers may have more opportunities to sell off cows in response to higher prices, affecting future supplies.
You shared forecasts of fed cattle prices continuing to rise through 2011 while profit gains are likely to be impacted by higher corn and feeder cattle prices. What are some of the factors that might come into play later this year that might provide a brighter outlook in 2012?
Given low heifer retention (down 5.4 percent as of Jan. 1, 2011, relative to 2010) by cattlemen, the tight supply aspect of current markets is expected to persist through 2012. This leads me to expect aggressive bidding by feedlots, providing staying power for feeder cattle prices. Similarly, while notably volatile, the historically tight supply-to-use situation of the corn markets would appear to likely continue into 2012. The corresponding outlook for fed cattle prices depends on the ability to pass along higher costs of production to consumers. Domestic beef demand strengthened as we moved through 2010. The ability to continue this trend is being questioned as consumers face historically high retail prices. (You can access demand indices Tonsor maintains by clicking here.)
Over-capacity at both feed yards and slaughterhouses is boosting lightweight steer prices beyond break-even. Is that scenario likely to continue into 2012?
The over-capacity of feed yards and slaughterhouses will not erode immediately and likely will result in continued aggressive bidding. More narrowly, I expect both industry segments to bid cattle up to prices that may exceed those of typical break-even calculations. This behavior is rational if operators can cover all variable costs and still make some contribution towards those fixed costs associated with today's excess capacity.
Where do you see beef exports in 2012 after two years of strong gains?
Most signs are for recent gains in beef exports to persist through 2012. This, of course, hinges upon global economic growth, exchange rates, and a host of other less obvious factors. Among those 'other factors' worth considering is the comparative position of the U.S. cattle industry relative to other major beef exporters competing for export market share. Developments by key importers (for example, South Korea now requires all imported meat to be traceable) and key exports (for example, Canada is developing a national system to more widely facilitate age verification) may result in the U.S. losing ground to other countries. The timetable of these events influencing U.S. exports is hard to forecast. Nonetheless, this and related issues deserve serious thought as the U.S. industry increasingly depends on export market maintenance and expansion.
Will the decline in U.S. beef imports continue in 2012 or be influenced by predicted tighter U.S.-grown supplies as you outlined?
The decline in U.S. beef imports has occurred largely as exchange rates have adjusted, making imports more expensive. One result of this was notably higher cull cow slaughter volumes throughout 2010. If and when the domestic herd begins to expand and cull cow slaughter volume is reduced, additional support for beef imports may develop as domestic supplies will be further reduced during the adjustment period of fewer heifers being fed.
What should cattlemen be looking for in terms of options to protect themselves from selling off cows in about 19 months?
The observation of expected profits around $100/cow for the representative cow-calf producer suggests few producers will face new market pressure to "sell off cows" in coming months. That being said, cow-calf producers may face an opportunity to sell cull cows at values unprecedented. Producers may well seize this opportunity.
More broadly, the historically high cattle prices are subject for notable optimism in many cattlemen discussions. The associated volatility with these higher prices signals unwanted risk to some and presents desirable opportunities to others. Cattlemen concerned that a "bubble" may be forming could consider implementing price risk management strategies such as hedging with futures or options contracts. Conversely, cattlemen more comfortable with increased price volatility may rationally elect to "ride the markets out." The net tone of these two camps of sentiment drives observed risk management strategies that are (or are not) implemented.
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