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Understanding commodities and cattle markets
Cattle prices without a doubt have taken many aback by their resiliency to remain at such high values. As we all now, the herd is at its lowest level in decades, while domestic and international demand remain powerful forces. Seasonally, cattle prices push higher into March, then set back into April, and normally decline into early summer.
The question many in the market are trying to predict is, "What happens to seasonality this summer?" Will it follow the norm? Judging from the cattle futures market at this time, market participants appear to think prices will not drift lower, as they typically do. Factors supporting prices are:
- Packers need to fill orders they have on the books, and to do so, they have to pay higher money to secure cattle from feedlots that are very current at this time.
- Export markets are very firm. Shipments are near 16,000 MT/week, compared to just under 10,000 MT/week a year ago, with South Korea and post-earthquake Japan still the biggest buyers.
- In fact, the growth in the Korean business accounted for almost half of all the growth in US beef exports for first quarter. Twenty-four percent of all of our US beef exports now go to South Korea. Shipments to Japan in late March were reported at 2,200 MT, compared to a weekly average of 2,100 MT in the previous 12 weeks.
Now, in addition to the general, matter-of-fact supply and demand factors, we can add one more element of excitement into the mix. Looking toward summer, drought in the some parts of the nation is pushing more cows into the market. However, some feel that cattle declines in other parts of the country have more than offset the drought impact ... so far.
Pasture conditions this summer will be a particular concern, since they impact the ability of producers to secure enough feed. The Daily Livestock Report from the CME says that, "Combined with high grinding beef (and thus high cow carcass values), this could make it difficult to halt the beef cow herd liquidation. The drought also will remove one source of profitability from beef producers, namely their ability to put more pounds on cattle outside of feedlots. This is particularly important in an environment of high grain prices. Drought has pushed light calves onto feed lots in recent months and that trend is likely to continue this spring and summer."
Now let's turn our attention to the consumer. While the economy is said and does appear to be somewhat improving, both domestically and worldwide, one of the major factors that can affect the consumption of any commodity is energy. Energy prices have continued to grind upward with crude oil challenging $110.00 a barrel. Since bottoming last summer, the June crude oil market has gained 49%. While the world needs energy products as well as food, it's unlikely that beef and pork demand can continue to climb as long as the energy market remains higher and prices at the gas pump continue to climb. Energy affects all countries worldwide, not just the U.S. This may be stating the obvious, though at some point, this may lead the export market to slow.
So where does all this lead?
Obviously, it would suggest that, from a long term perspective, the cattle industry (which has followed roughly a ten-year cycle) will plateau to another new "higher low level." That is, the cattle market is now likely well-supported in the mid $80s to low $90s. However, to maintain $105 to $120 may be a bit of a stretch, especially in light of the idea that commodities as a whole may be overvalued and perhaps substantially.
The same can be said for the hog market. Nearby charts for both cattle and hogs look somewhat tired. If you're a producer, be sure to forward sell or utilize puts or hedges on at least a portion of your production. It's easy in a bull market to get lackadaisical. However, once prices begin to turn, usually the slide is unforgiving, and the opportunity to get high levels back becomes more and more of a challenge.
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