Heat cuts cattle prospects
You can sit in a room and watch prices flicker on a screen, but the key to the U.S. cattle market for the next six to nine months may lie outdoors, right now, in the clouds.
In fact, if Midwest weather creates a subpar 2011 corn crop, the cattle industry definitely faces a tough year ahead, say analysts.
Notably, both broad sectors of the cattle industry -- the cow/calf producer and the feedlot -- are especially affected by the weather so far this year and in the months ahead.
For the past year or so, drought in key southern calf areas -- as well as the lure nationwide of converting forage land (hay and pasture) to lucrative grains -- has encouraged U.S. cattle producers to shrink their breeding herds.
Here in late summer, whether that shrinkage continues could depend on whether the South has seen drought-ending rains over the past two to three months.
Linn Group analyst John Ginzel sees no signs that herd liquidation will end anytime soon. This summer’s cattle inventory report was expected to show the smallest U.S. cattle herd in 50 years.
So the broad key to the industry in coming months, says Ginzel, will be whether cattlemen continue to shrink their breeding herds, or whether they begin expanding. Many analysts estimate expansion will show up in three-to-nine months. It all depends on weather.
The other sector of the cattle industry-- feeding young animals out to slaughter weight -- is also paying close attention to the weather this year. Feedlots have been managing to squeeze out some profits despite high corn costs, and that has kept the cow-calf business in ear tags. But analysts expect May-September feeding margins to be squeezed before improving in the October-December quarter -- provided the corn crop increases over last year.
But if the harvest looks light, feedlots face poor feeding margins until the 2012 crop is harvested. And over the next year, that would ripple down the line to the cowman. Some cattle operations may even go out of business, warns Des Moines broker/analyst Kevin Penner. If corn prices move higher now through year-end, he fears a glut of cattle being pushed out of feedlots early. That could shave perhaps $15 or so per hundredweight off the price of live cattle, says Penner, who contributes analysis to Twitter and the AgTraderTalk.com website.