| | Three terms you’ll hear a lot these days in beef cattle markets are seasonal patterns, trends and cycles. In this article, I’ll introduce these three time dimensions, review the current market situation, provide short term outlook and put marketing into context with the overall business of managing your cow/calf profit center.
Seasonal patterns are short term regularly occurring annual events. The large marketing volume of calves after weaning is a good example (Figure 1). These events are often expressed as highs and lows. Comparing the large volumes of calf sales to fall run prices helps build an understanding of market fundamentals.
The trend component involves the longer run direction of the industry. An example is the change in beef production over the past decade.
The trend of increased beef production (Figure 2) is paralleled by a trend of beef export growth. Export markets have absorbed an increasing share of our beef production, and lent support to local calf prices in the process.
Finally, cycles refer to events that tend to repeat over a period of years. The cattle cycle is a prime example of this concept. Cattle cycles are in large part a response to the biological nature of beef production. The length of time it takes producers to respond to price signals (to get a heifer calf to produce her first calf) creates a lag between price highs (lows) and subsequent inventory highs (lows).
In general cattle inventories peak about once every 10 to 12 years. Keeping an eye on the cycle helps us understand where prices are headed. I’ll go into cycles, and the other time aspects, in future issues.
A working knowledge of these time concepts builds an understanding of market fundamentals and becomes a valuable addition to your "manager’s tool box".
Economic signals
With this in mind, what do the market fundamentals look like today? Record high price levels, resurgent beef demand, and relatively low feed costs have contributed to a renewed profitability in the cow-calf sector. The resulting strength of cash flow positions influence producers’ decision making processes – either:
- it takes fewer calves to net out the same sales revenues (opening the possibility to keep a few heifers back), or
- the good prices today build desire to increase the cow-herd base for even larger profits.
Cattle supply forecast
Statistics Canada’s latest Livestock Estimates report indicates Canadian cattle producers have continued the inventory liquidation trend that began four years ago. The number of beef cows and heifers that calved on Canadian farms (at July 1st, 2000) is down 2% from year-ago levels. However, Alberta and Saskatchewan producers have indicated a desire to expand, with heifer retention up 3%, and 7% respectively, echoing trends of lower heifer slaughter thus far in 2000.
By comparison the United States appears headed for another year of consolidation. Drought conditions extending from Texas to the Canadian border are effectively pushing back any expansion plans into 2002 or until pasture situations improve.
For Alberta cattle feeders, the first significant gains in calf crops (feeder cattle supply) from herd expansions are still a year or two away. Until then calf supplies will remain tight.
Beef demand
By most accounts, the price improvement for 2000 has been demand-driven. The first half of 2000 witnessed a continued resurgence of beef demand (up 2.3 % in Canada last year). While movement has slowed in recent months, export markets have helped pick up the slack. As well the recent outbreak of foot-and-mouth disease in Argentina has slowed the South American "beef train" for the moment, setting back most of the region’s aggressive export plans.
Price forecast
With the fall run upon us – lots of calves coupled with relatively tight feeding margins – prices will be under pressure in the weeks ahead unless feedlots are intent on running at full capacity or are able to extract more dollars from the processing end.
Figure 4 relates that for the near term, the downside looks to be about 15-20% off the August peaks, somewhere in the $1.40 to $1.50 per pound range. With the Canadian beef herd looking by all accounts to be heading into an expansionary phase, tight calf supplies should mean steady prices for a couple more years.
Risk management
Managing your risk in this time of transition is critical. Creating flexibility in your operation, in:
- resource use,
- risk management strategies,
- asset ownership, and
- equity and cash flow management
will allow you to take advantage of opportunities this next cattle cycle presents, or at least help avoid the pitfalls.
With prices at record levels and ample profits, the best choice may be to sell all your calves and stock up the cash reserves. If you are intent on building up your herd at least make a mental note of:
… What is it costing you to keep each heifer, in terms of foregone sales revenue this fall?
… How many dollars can you expect to make over her productive life?
Harlan Hughes notes that the 2000 bred heifer may well prove to be the most expensive cow in your herd during this turnaround phase of the beef cycle.
Undoubtedly cost control has been a big focus over the past few years. Now is the time to make all that hard work pay off. A little marketing this fall can go a long way. With this in mind remember you don't have to move your calves now to get them sold! You have forward selling options allowing you to price your calves relative to today’s price levels for delivery in the future.
Key market factors
Profitability conditions in the cow-calf sector will continue to build momentum for another round of growth – the key is how aggressively the industry proceeds with heifer retention and how long before US expansion begins. Here are some questions for you to ponder in the coming months:
- Feedlot Margins: Will the hefty losses over the last few months and high breakevens ahead pressure operating margins enough to spill over to the calf market?
- U.S. Beef Herd: With the drought ravaged regions of the southern Plains continuing to market cattle (especially heifers), the US cattle cycle will likely fall one year behind our trend.
- Beef Demand: Is this renewed strength in beef demand for real? Will rising energy prices stimulate inflationary pressures – on interest rates and exchange rates – and impact consumer spending, domestically and abroad?
What effect will these issues have on your farm’s bottom line?
Darren Chase
Livestock Market Analyst
Phone: 780-422-4056 Fax: 780-427-5220 |
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