Markets are wonderful self-correcting mechanisms that do a remarkable job of inducing multitudes of consumers and producers to make adjustments to constantly changing market conditions. Most of the time they do this so subtly that the process goes unnoticed. However, in times of large shocks or major changes in markets, the process is more obvious. In these situations two things become more apparent; big adjustments are often painful and they are often frustratingly slow.
And so it is with cattle markets. Most of the past three years (or six if you start with BSE) have been a rollercoaster of shocks and changes, some short run in nature and some likely more permanent. Arguably the biggest of these and one that is likely more permanent is the change in feed prices. Although the massive initial shock waves of high corn prices have subsided a bit, the beef industry is still making adjustments to reestablish profitably in the industry, especially in the feedlot sector. The industry has made significant adjustments by changing the manner and timing of cattle feeding and has been helped by three consecutive large corn crops that are giving us currently the lowest corn prices that can reasonably be expected. Still feedlot profits remain elusive. Although feed costs have moderated in recent months, the global recession has produced weak beef and fed cattle prices resulting in continued feedlot losses. The pain is very real and the long term reality of reducing excess capacity (feedlots closing) is underway at this time. Nevertheless, there is some potential light at the end of tunnel.
The near certainty of a 13 billion bushel corn crop this fall suggests that corn prices will remain in the $3/bushel range and keep feedlots cost of gain in check. Projected feedlot budgets, relative to live cattle futures, are almost at the point of showing a breakeven for cattle feeding. It will take months of profitability to stop the structural adjustments to feedlot capacity that are underway but it would only take a bit more help in terms of lower feeding costs or higher fed cattle prices to begin the process. There may begin to be some opportunities to lock in profitable margins in cattle feeding and that may offer more opportunities for cow-calf and stocker producers to have retained ownership as a viable alternative. Macroeconomic recovery that translates into stronger beef demand is possible in the next few months and will certainly help the process.
Markets do not sit still and inevitably markets will continue to adjust and move towards relative input and output prices that allow profitability and more stability (in the absence of additional shocks!). Opportunities will appear and disappear along the way and producers should look for chances to take advantage of those opportunities. History is less of a guide in dynamic times and rules of thumb based on history are downright dangerous. Nevertheless, there are opportunities.
Author : Derrell Peel