As Cattle Prices Try To Claw Back, Rally May Not Be Sustainable
FJR 3.28.20
Cattle prices are on a historic ride. Producers are trying to make sense of it all, as well as industry insiders.
“I think this is completely unprecedented,” says Derrell Peel, Oklahoma State University livestock specialist. “In the cattle industry, specifically, we've had lots of things that have shocked the market over the years: the packing plant fire in 2019, or maybe even all the way back to the first BSE case in 2003. Those are specific events and they do cause massive shocks in the market. But pretty quickly, you can think past the event and get on with how do you deal with it and how to recover. This one is different."
"Two things that in your wildest dreams, you probably can't ever come up wit these things and imagine you'll be dealing with them," says Troy Hadrick, of Faulkton, South Dakota. "So, I think that does get a little frustrating."
The frustration is being voiced by not just ranchers and feeders, but also veterans in the industry.
“I am extremely frustrated with the futures market, because for the last three weeks, the futures market has not reflected the true fundamentals of this market, particularly going forward,” says John Nalivka of Sterling Profit Tracker.
The current situation is a mad rush for consumers wanting to stock up on protein. The COVID-19 scare sent consumer scrambling to the grocery store. As a result, 210 Analytics says meat department sales surged 77%.
“The difference is some ground beef is priced at $7.50 a pound in one location, where similar products are priced at $4.50 a point in others,” says Greg Henderson, editor of Drovers. “So, there is a big difference in price and there’s a difference in the way processors are handling the problem.”
While bigger boxed beef prices are one sign of soaring meat demand, futures prices tried to claw its way back last week, with CME even extending the limit for the March contracts. Even with the price climb, it’s a heavy load for producers facing two historic events in less than a year.
“This is the second ‘black swan’ event the cattle industry has faced in the last six months,” Henderson says.
Peel says the difference with COVID-19 is it is global and doesn’t have a clear ending.
“This is an evolving situation,” he adds. “We don't know how bad it's going to get and when it's going to get that bad, let alone how we're going to recover from it after the fact.”
The latest Sterling Profit Tracker showed packers saw $594 per head gains two weeks ago, while feedyards faced nearly $90 per head losses. Nalivka says better prices last week should help the situation.
“It certainly makes a difference when we've got cattle trading at upwards of $1 to $1.20, and that's that makes a considerable difference and will bring the feedlots back into the into the black again,” he says.
Even Tyson Foods acknowledged the price disparity by telling cattle feeders the company would add $5 per head to live cattle and nearly $8 per head to dressed and grid cattle.
“Not all processors are participating,” says Henderson. “Some have decided to cut the price to beef going out the backdoor to retailers in order to help those retailers fill those empty shelves that I’m sure everyone has seen by now.”
Henderson says the problem with prices for cattle producers today is the futures price is having a hard time catching up to the cash price. As cattle prices tried to climb back last week, the bullish run could be short lived.
“I think we're probably near the peak of the cattle slaughter,” says Arlan Suderman of INTL FCStone. “Overall, we've been trying to restock people's freezers and that is starting to slow down. Now the load counts are starting to slow. I think we're close to accomplishing that. And people tend to eat less meat when they're at home versus a restaurant.”
As producers see the price pain, Peel says difficult decisions will need to be made.
“What are you doing in the short run, and if your tendencies is to sort of think, ‘well, can I buy some time here to sort of wait this out?’ I think waiting this out in the short run for the next 30 to 60 days is an option,” he says. “In this case, I see little prospects, or anything definitive that could happen, that would allow these markets to rebound significantly and confidently in that timeframe.”
Peel says while the short-run looks to be the worst, widespread uncertainty isn’t helping producers trying to plan.
“I think, clearly, we are on defense now,” Peel adds. “We are sort of pulling back any aggressive plans, like expansion plans. We're are going into hunker down mode a little bit here. Think about how to get through this even with the uncertainty involved for some producers. Before long, if not already, we have to think about, the financial consequences of this situation, and whether or not we have to start doing some things financially to make sure we weather this event.”
As cattle producers try to weather this storm, there’s hope warmer weather could bring hotter beef demand.
"I'm confident it's all going to shake out, but I think the market has the same psyche as everybody else in the country night right now, and that's just a lot of unknown," says Hadrick.
As cattle producers like Hadrick wade through uncertainty, Peel wants to leave those in agriculture with a message of hope.
“I think the key is as producers, you recognize there's a lot of trepidation, a lot of frustration with this situation,” he says. “We don't know what to do. We don't know how it's going to evolve, but we're all in it together.”
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