Is there a turnaround occurring in the cattle market? Apparently, cowboys see some opportunities for profitability and their recent actions to increase feedlot inventories indicate a light at the end of the tunnel for the beef industry. Is that a glimmer of hope or is that an approaching train wreck?

Last Friday’s Cattle on Feed report indicated September feedlot placements were up 5% while marketings were down 4%. The difference shows a 1% increase in the feedlot inventory. Looking back at history, that is the first month in the past 16 that inventories have increased. They have all decreased since the spring of 2008. With the reports of a good corn crop and adequate supplies of feed, cattle feeders apparently see the potential for profits next summer.

At Iowa State, livestock economist John Lawrence puts it in terms of a “crush margin” and says that is the return remaining after accounting for the feeder steer and corn that is used to cover the other more constant expenses. His crush margin for feeder steers put on feed now and sold in March provide a crush margin of $178. That increases to $219 for November placements marketed in April, and $204 for December placements marketed in May. While his calculations decline, the crush margin remains between $100 and $160 for the next 12 months.

At Purdue, livestock economist Chris Hurt says he sees “a host of economic indicators suggest the recession has ended and the economy has more positive signs than negative.” In his latest newsletter Hurt lists those indicators as “the rise in the average length of work week, rising building permits, falling numbers of new claims for unemployment, and of course the rising stock market.” While he thinks inflationary investing has underpriced cattle, he says the fundamentals are positive for the beef industry.

Hurt saw the same numbers as Lawrence and projects a rise for Nebraska finished steers through the end of this year with cattle moving into the mid to higher $80s early next year. He does not expect the typical summer softening of the market and says summer 2010 should bring prices in the low to mid $90 range.

Hurt looked back on the impact of the recession, which took cattle prices from an average of $92 in 2008 to $83 this year. With a $10 climb anticipated, Hurt says cattle producers can “ride the recovery” as the US climbs out of the recession. But he is quick to suggest the need to grab a strong hold on reality and manage your potential risks. He says the recovery could be an anemic recovery, or there may be a second recessionary dip.

Hurt suggests cow-calf operators “stay long cattle at least for now.” He says retain ownership of calves for a longer period and consider feeding them out rather than selling them this fall. For feedlot operators, Hurt suggests, “waiting a bit to forward price the finished cattle in order to give inflation investors a little time to locate the cattle futures trading pit.”

Summary:
The beef industry is beginning to see the opportunity for an economic recovery with higher cattle prices in the coming year and changes in the cattle inventory. Feedlot placements are up more than marketings, and there is more money to be made with cattle placed in feedlots in the next several months than any time in the past 16 months. Livestock economists suggest that risks be managed to avoid unseen economic challenges, but they may be able to benefit from the recovery of the US economy.

Source: Stu Ellis, University of Illinios