Economist: Cattle Prices Should Ride the Recovery Upward

Souce:  University of Illinois news release

A host of economic indicators suggest that the recession has ended – with more positive than negative signs for the U.S. and the world economies – signaling a recovery for the cattle industry as well.

"Unfortunately the beef industry rode the recession downward. So far this year, through the month of September, beef production has been down by 5 percent, but finished cattle prices have been almost $11 lower than in the same period last year,” says Chris Hurt, Purdue University Extension economist.

Nebraska finished steers averaged $93.60 per live hundredweight in the period between January and September 2008. This year those values dropped to $82.75. Steer calf values have also been about $11 per hundredweight lower and feeder cattle about $9 lower.

Beef and cattle prices are generally more directly impacted by changes in economic prospects than pork or poultry markets, moving downward with recession and upward with recovery.

"The indicators of recovery are beginning to become more numerous in such data 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. The recovery is expected to be slow by historic standards with unemployment remaining high into 2010. However, the unemployment rate is a lagging indicator and not the one to use as the measure of recovery,” says Hurt.

Inflationary investing may be another reason cattle are underpriced.

"In the past six weeks, there has been a resurgence of inflationary buying in futures markets. This has also been related to the continued weakening of the U.S. dollar where the lead futures contract has been down 5% since September 1,” says Hurt.

"Since that date, the lead futures contracts for various commodities have been shooting upward: corn up 19%, copper and gold 5 to 10% higher, and crude oil up 14%. In contrast, the lead contract for live cattle futures has been down about 2%. This may well mean that cattle are cheap relative to other commodities,” he says.

The fundamentals are positive for beef as well. Production will continue to drop as both export and domestic demand improve with the recovery. USDA expects exports to increase by 3% over the next 12 months.

"Given that the rest of the world may recover more quickly than in the United States, and with the weak dollar, U.S. beef exports could do well. Per capita available supplies in the United States will decline by 2% over the coming 12 months, and competitive supplies of pork per person will be down 5%,” says Hurt.

While more cattle have moved into feedlots in recent months, the overall indicators suggest that the breeding herd will continue to drop in the January 2010 inventory report.

"Cheaper corn, meal, and feed ingredients late this summer did cause a larger number of lighter-weight calves to move into feedlots. In August and September, placements of cattle weighing under 700 pounds were up 8% while those over 700 pounds were up 1%. With corn and feed prices moving upward in recent weeks, it is likely that placements in October will slow once again,” says Hurt.

"Perhaps more important was that the number of heifers in feedlots on October 1 was up 4%, indicating a relatively low rate of heifer retention to go back into breeding herds. This supports a 1 to 2% drop in beef cow herd numbers in the January 2010 inventory,” he says.

The clearest threat to cattle producers is that economic recovery will be anemic or there will be a second recessionary dip, but cattle prices are expected to move upward over the coming year.

"Nebraska finished steers are expected to rise from the current low $80s to the middle $80s by the end of the year. The general pattern to higher prices is expected to continue in the first quarter with prices in the mid to higher $80s. Early spring daily highs could move into the very low $90s or higher depending on the strength of the economic recovery. Summer are prices normally are a few dollars lower, but that may not occur in the summer of 2010 as prices could stay in the low to mid-$90s,” says Hurt.

Assuming the industry is able to ride the recovery, producer pricing strategy should be fairly clear.

"Stay long in cattle, at least for now. This means retaining ownership of calves for a longer period, considering feeding out calves rather than selling them this fall, and for feedlot cattle, 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,” says Hurt.