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Livestock contraction

Agriculture.com Staff 02/18/2008 @ 6:41am

The livestock futures markets over the last couple of months indicate that herd contraction is underway.

Deferred lean hog and live cattle futures contracts have rallied, while front month and current cash values have slid. The rationale is simple: With corn trading $5 or higher on futures, expectations are that the livestock industry will go through a contraction phase.

Is the market correct? We think it is! When corn futures have moved as high and as quickly as they have, not to mention a rally in soybean meal, margins are pinched. For the first time in years, both hog and cattle producers are working either at low margins or in the red. It is the red area that most want to avoid. With uncertainty growing over input costs, more sows and gilts are pushed into the weekly slaughter mix. In addition, cow slaughter numbers are on the rise. Bottom-line, the invisible hand of economic forces is changing the landscape for livestock producers.

The latest question, however, is this: Now that deferred livestock prices have rallied, will livestock producers slow or stop contraction now that they see better potential toward the end of 2008 and early 2009? The answer is yes. Assuming normal corn production in the year ahead, feed buyers could acquire corn as much as $1.00 to $1.50 lower by mid to late summer. Assuming yield is trendline or higher, expecting a stable livestock herd is reasonable. If that were to occur, margins could improve, and being a livestock producer once again could pay good dividends. For now, though, liquidation will keep supplies ample and prices unable to rally for the next few months.

If you have questions or comments contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

The livestock futures markets over the last couple of months indicate that herd contraction is underway.

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