Cowboys can’t afford another lightning strike

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The old saying that lightning never strikes twice in the same place has been disproven by the beef market which has been reeling from lightning strikes, first by lean, finely-textured beef, and more recently by the discovery of a cow with bovine spongiform encephalopathy (BSE).  The market has declined from $129 per cwt to $120 for finished cattle before these events, and the futures market has lost $15 for June live cattle contracts.  Don’t bet on the saying “The third time is the charm.”

There is no indication that beef lovers are turning vegetarian, even though nervous traders of cattle futures may think so.  Purdue livestock economist Chris Hurt says, “For now, market participants are taking a cautious approach until consumers more clearly define if they will reduce beef consumption.  Hurt believes that the larger drop in futures, compared to the cash market, indicates futures traders have over-responded to the potential negative fears of consumers.  On the other hand, he says, “There of course can be other possible explanations such as the possibility that futures markets were just too bullish on cattle prices in early March.  This argument would suggest that the excess optimism had to be taken out of the futures with prices forced to drop more than cash.”

The beef industry is a unique commodity, says Iowa State University livestock economist Shane Ellis because beef stays at home and becomes a home-grown fundamental of supply and demand, “because most of our nations beef supply is produced and consumed domestically there tends to be less uncertainty in the supply of beef or where the beef will be utilized. Cattle prices were getting stronger in the first two months of this year on the prospects of tighter cattle and beef supplies during 2012, but when consumer demand started to sway under weaker consumer confidence and record high beef prices at the meat counter, cattle prices declined and then steadied.”

Because of the cowboy’s reliance on the US consumer for his market, Ellis says he may be suffering from a lack of needed diversity, “Whether they are looking at the price of gas at the pump, domestic employment rates or the global macroeconomic outlook, there is not enough good news to build consumers’ confidence. Until there are better signs of the economy improving we will not see cattle prices making any improvements.”

Could the beef market continue to weaken?  Ellis thinks so, “The troubling part is that there is still room for the price to decline further. The 5-area weighted average cattle price is still at a record high for the last of week of April, and was not quite enough to keep cattle finishing easily profitable.”  But Hurt is concerned about the potential for a third lightning strike.  He says each of the two hits so far have done damage, and the damage may have been multiplied because there were two negative events so close together, “Probably a final reason to be cautions is the worry that, ‘the other shoe is going to fall.’  This simply means that a third negative event could have even larger impacts.  That might include something like finding another BSE cow in the U.S. herd that increased concerns of a larger problem.”

Hurt points to a positive fundamental as being the diminished supply of beef, as a support for prices.  But Ellis is more reserved, and says while the overall cost of food has been going up, the increase in the cost of beef has been more pronounced, “Ultimately we are reminded of just how sensitive the beef and cattle market can be to the economy. The unexpected bumps in the road can and will have a negative impact on the cattle market in the short run, but long term strength depends on the growth of economy and consumers having enough disposable income to spend comfortably.” 

For the livestock producer, Hurt says the soft prices may have discouraged some producers from expanding, particularly with the high rates of cow and heifer slaughter.  He says futures prices are excessively low and without any further negative events “forward prices are too depressed right now.”  Hurt says only time will tell whether the market will recover.

Source: FarmGate blog


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