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Spring/summer cattle prices may succumb to lower demand; 2010 looks better

With a demand-driven market leading the way this spring/summer, the cattle industry is bracing for lower prices.

From a producer standpoint, the best way to explain the current cattle market is this: Survive 2009 to be alive in 2010.

John Nalivka, president and owner of Sterling Marketing, sees a lack of demand affecting the cattle market headed into the spring/summer months.

"I'm more optimistic for better cattle prices in 2010 than 2009," Nalivka says. "If demand is the issue, we'll need some time to work through lower cattle prices."

While coming to his short-term bearish, long-term bullish market outlook for spring, Nalivka is looking at the reduction of cattle numbers in the last three years.

"We are moving into a declining cattle supply situation. I don't think anybody will deny that. In 2008, cow slaughter will be 9% above a 6% increase in 2007, those combined were above a 12% increase in 2006. A large percentage of those animals were beef cows," Nalivka says.

Add in the fact that there are reduced heifer numbers in 2009.

"As a result," he says, "We haven't been building herds. This is all a result of high feed costs such as $7 corn and $200-per-ton hay. So we're looking at declining cattle numbers going out to 2010."

These factors are all long-term supportive for cattle prices.

"From the fed cattle perspective, we have too much feedlot capacity and packing capacity. This usually means feedlot operators and packing plants will bid up," Nalivka says.

Nalivka's short-term bearishness comes from a poor economy affecting beef demand.
"People are paying closer attention to their dollars. More people are hunkering down on food budget, not eating out as much, and using cheaper meat products. Plus, U.S. beef exports have slowed, putting pressure on market prices," he says.

Nalivka adds, "I'm skeptical about beef demand holding up the live cattle prices, which you would expect given a known reduction in supply. Someone can talk all they want to about a smaller supply, but you still have to sell the beef," he says.

Nalivka is estimating spring fed cattle prices to be near last year's prices. In June, with more cattle in the feedlot, fed cattle prices are seen dropping to the $80's, he says. Breakeven for April cattle coming out of the feedlot is 80 cents.

"If you have an $89 to $90 steer, then you will realize a $100-per-head margin," he says.

For feeder cattle (750 to 800 pounds), he estimates prices between $97 to $98 per cwt. He sees feeder cattle prices hitting $100 per cwt.
in June.

For the steer calf market (450 to 500 pounds), Nalivka estimates summer prices up 10% to 11% vs. a year ago, which was around $1.23 to $1.24 per cwt.

Nalivka offers three ways cattle operators can set themselves up for profitability in 2010.

1. Run your operation with best costs
If you have to buy 10,000 gallons of diesel a year, you have to do it. But be aware of the marketing environment and watch for pricing-ahead opportunities.

2. Optimize production capacity
Whether it be land or grazing, increase revenue without raising costs. Increase the value of each pound of beef you sell; don't just sell more pounds.

3. Add value without adding costs
The marginal revenue from that added value should exceed the marginal costs. This is where intimately knowing costs of your operation is critical.

With a demand-driven market leading the way this spring/summer, the cattle industry is bracing for lower prices.

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