Speaking at Intervet/Schering Plough’s Cattle Feeders Summit this week in Denver, Cattle-Fax senior market analyst Kevin Good said that in spite of lackluster demand and flat cattle prices, cattle feeders could have some opportunities to lock in profits over the coming months.
In the short term, Good says, there are plenty of challenges in both supply and demand. Historically low milk prices have led to a year-to-year increase in dairy cow slaughter likely to total 300,000 to 350,000 head this year, more than enough to make up for about a 300,000-head decrease in beef-cow slaughter.
Overall, cattle slaughter this year will be about 4 percent less than in 2008, but with heavier dressed weights, beef production will decline about 1.5 percent. Relatively short placements in recent months suggest a lot of yearlings remain on pasture and will ship to feedyards over the next few months. Heavier in usually means heavier out, so slaughter weights are likely to keep moving higher.
In the longer term, U.S. beef production will continue to decline. Heifer placements into feed yards are running around 36 percent of the total, and have been on the rise since 2002. The U.S. cow herd has contracted in 11 of the past 13 years. Per-capita supplies of beef are down about 1.2 pounds since last year, with supplies of competing meats also lower. These trends point to higher cattle prices, but we need an improvement in beef demand for that to happen. The beef demand index, which generally improved since 1998, dropped about 8 percent this year.
With current fed-cattle prices hovering around $81 to $82 per hundredweight, the futures board offers significant premiums in late 2009 and early 2010 contracts. Historically, Good says, when futures prices top the cash market, feeders tend to pay too much for cattle, don’t manage risk and end up losing money.
While current premiums in deferred contracts, at around $90, are well below those we saw last year, they could offer some profit opportunities for feeders, Good says. Corn prices have dropped to about $3 per bushel, near the level they were at in 2007. This year’s crop looks to be one of the biggest ever, but Good says demand for ethanol production and exports are likely to increase in coming months, and $3 might be as low as the price goes, for this year’s crop and into the future. Feeders who lock in some of their corn needs, and watch for hedging opportunities for cattle placed against the fall, winter and spring markets, could lock in some profits.