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Capture the Cash

April 26, 2014
By: Sara Brown, Farm Journal Livestock and Production Editor
Flying Money
  
 
 

Develop a profit strategy and don’t look back

Higher cattle prices mean there is more at risk for your profit margin. Don’t just let the good times ride—be ready to capture every dollar.

Cattle inventory is at its lowest since 1951, just under 88 million head, mainly due to persistent drought. Since then, however, the dynamics of the market have changed.

"Cattle numbers being the lowest since 1951 is a big deal, particularly from the standpoint of industry infrastructure. But, that’s where the comparison stops," says John Nalivka, president of Sterling Marketing. "We are producing two to three times as much beef with the same number of cattle today as we did in 1951. Since then, the product, industry and consumer have all changed. It’s just not the same world."

A marketing consultant to beef and pork packers, processors and restaurants, Nalivka says the beef supply chain is still adjusting to lower cattle supplies. As cattle numbers drop, excess feedlot and packing capacity increase. "In the last two decades, we’ve gone through a lot of consolidation on both sides of that equation, but here we sit with still too much capacity," Nalivka says. "This leads to questions of who is going to shut down a packing plant, and who is going to close down a major feedlot. We are shrinking the infrastructure of the industry.

The fewer number of feeder cattle available pressures the economics of packing plants and feedlots alike. "When we look at feedlot breakevens, they are doing very well right now. But every head of cattle standing at the feed bunk today has to be replaced, and it is going to cost considerably more to do so. Cattle marketed today have a breakeven of $1.25 per pound, but those replacements have a breakeven of $1.40 per pound," he explains.

Cash takes the lead. For several months, the cash market has remained superior to the futures—an indication of the tightness of the feeder supply. On weekly market updates at www.BeefToday.com, Julianne Johnston, digital managing editor at Pro Farmer, says the cattle market is locked in a tight supply situation.

"For some time, traders have been really comfortable with the nearby contract trading at a discount to the cash market, which says they know that supplies are tight and they need fresh news to propel this market any higher," she says.

"The market did what we thought it would do. The 10-year cattle cycle was delayed another year because the drought lingered on and we kept sending heifers into the slaughter mix," Johnston says.

Other proteins in the meat case will also play a part in consumer demand. "Keep in mind how the porcine epidemic diarrhea virus is affecting the pork industry. Pork prices still look like a value compared to beef, but one of the best things to happen to beef demand this summer could be a rise in pork prices," she says.

"We’ve seen a 20% to 25% increase in wholesale beef prices, but the consumer hasn’t had to face that yet at the retail meat counter," Nalivka adds. "We don’t know what the reaction of the consumer is going to be. No one wants to see beef demand go down, but this will test it."

Will the market turn? According to USDA’s production outlook, cattle supplies will be at their tightest this summer through 2015. "There is a chance we could see another big run," Johnston says. "But downside risk in the cattle market is limited because demand is so tight.

"Even if domestic demand slows, we are still exporting a lot of beef. Tight supplies will keep prices at $120 per cwt. to $130 per cwt. this summer and fall. We might see prices dip into the $120 handle, but I don’t see it lasting long," she says. "Just think what beef demand would be if our economy was growing at a faster pace—we’d really see strong summer and grilling season demand."

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FEATURED IN: Beef Today - Late Spring 2014
RELATED TOPICS: Beef, Farm Business, Management, Cattle

 
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