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Cattle Optimism: Is The New 'Animal Era' Just Beginning?

The news continues to be laced with doom and gloom for U.S. crop farmers. But, there's a silver lining to the cloud over the currently bearish corn and soybean markets, and it's emanating over the livestock sector, namely for beef cattle.

The grains are headed toward harvest on an even more bearish plane than normal for this time of year. But at the same time, the cattle market's been a bright spot. Demand is strong and feed's cheap, and these factors continue to fuel a renaissance in the beef sector.

"The first week of September has proven to be a bearish week for grain prices and a bullish one for live cattle. Corn futures broke into new contract lows on their way to factoring in what will likely be a record crop. Cattle, on the other hand, continue to rebound after a recent sell-off on ideas that tight inventory and a drawdown on prices have provided a boost of demand. Cattle futures are trading at high levels, and the idea of expecting continued demand to develop as prices move higher may be far-fetched," says Stewart Peterson Group Inc. and Market Analyst Bryan Doherty. "Grain prices are cheaper than they have been in years. We expect cattle weights will be heavier into the fall and winter months. Therefore, the opportunity for livestock producers to capitalize on low-priced corn and high-priced cattle is at hand."

Right now, that opportunity looks to comprise corn call options and banking on a lower corn market that, if it does rebound, will do so after considerable foreshadowing.

"With what appears to be an abundant supply of corn available to the market this fall, you will likely buy only as needed and stay away from long-term buys. At least that may be your mentality. On the other hand, call options provide a safety valve against an early frost or general price recovery in the market," Doherty says. "We would, however, contend that if the futures market provides a strong bottoming signal, you should look at booking at least one year (if not two) worth of feed inventory."

Though Doherty's advice stretches just through the next few months, the notion that the livestock sector will continue on solid footing while the grains falter is one that has legs beyond late 2014 and early 2015. And, lower grain prices make up just one piece of the overall pie, says Purdue University ag economist and livestock market expert Chris Hurt.

"The animal industries finally have a positive multiple-year outlook. The favorable income prospects will be based on feed prices re-setting to lower levels, continued reductions in drought affected pastures, and to strengthening domestic incomes," Hurt says. "Animal industries are expected to be in a mini-boom phase in coming years lead by rising per capita consumption, continued small growth in U.S. population, and growing export demand. An important determining force of how big the boom will be will depend to what level feed prices re-set?"

This "boom" time will likely mirror the last few years for the grains, one during which livestock infrastructure will grow to support larger herds that will capitalize on lower grain prices until things rebalance again.

"The next era for animal industries will be one of rebuilding herds and flocks. This will be a multiple-year process and will be characterized as a role reversal for the crops sector and the animal sector. If the years from 2007 to 2013 could be described as the 'Grain Era' in which crop sector incomes had an extraordinary run, the coming period may be described as the 'Animal Era' when producers of animal products have strong returns. During the 'Grain Era' some resources like pasture land and forage production were converted to cash crop production. In the coming 'Animal Era' there will be some incentive to convert cash crop land back to animal industry use. This will be most predominant for the marginal cash crop lands of the central and western Great Plains," Hurt says. "This mini-boom phase for animal agriculture will be economically supportive to rural communities with strong animal populations. It will also stimulate economic activity in industries that supply, market, and process animal products including animal buildings and equipment, animal feed, haying and forage equipment, animal pharmaceuticals, and lending for animal expansion."

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