What Happened to Cattle Markets?
By John Ritten, UW Extension Economist
In the last month or so, I’ve been getting the following two questions a lot. What happened to the market? And, will it “get fixed” anytime soon? The first is easier to answer than the second.
The markets have crashed for a few reasons, some of them more worrisome than others. One of the main reasons we are seeing depressed prices is due to the glut of overweight, overfed slaughter-ready animals. Rather than pay record prices for feeders, feedlots have been extending days on feed for the last few months. They have decided that is was cheaper to put a few extra pounds on animals already in the feedlot as opposed to sourcing new placements. This strategy worked for a while, but the heavy, often over-finished, carcasses, have finally caught up with them.
We saw record carcass weights last week, at over 920 pounds, which means we’ve increased carcass weights for 66 consecutive weeks. In response, packers have been less aggressive in bidding, as each carcass is larger, resulting in more beef production in total, but more importantly adding to extra trim and byproducts that need to be moved.
Another major cause of the downturn in prices is the global economy. Part of this is due to the devaluation of the Chinese currency. The way China handled the devaluation had ripple effects through the global economy and has depressed prices in many sectors in many countries. The Chinese devaluation makes U.S. products more expensive, limiting U.S. beef sales in China, but more importantly, it created a scare in global markets, depressing, at least temporarily, global consumer confidence.
Brazil similarly devalued their currency recently, and while that action received less attention in the global press, it could have a large impact in the livestock industry. The devaluation will make Brazilian beef relatively cheaper on the global market and will likely take some market share from U.S. beef.
To me, though, perhaps more worrisome in the long run is that the dollar continues to strengthen in comparison to other currencies. A strong U.S. dollar is usually considered a good thing, as imports become cheaper, and as consumers we are generally happy as we can afford more goods for a given level of income.
However, for producers who rely on export demand – estimates are that exports add up to $30 per hundredweight to cattle prices – a strong dollar can be problematic as we can begin to price ourselves out of foreign markets as our products become relatively more expensive in other countries. The reason a strong dollar worries me more than the China devaluation is that I believe the markets overreacted to China’s action and a correction is looming in the relatively near-term. However, as the U.S. economy looks to be on pace to outperform most of the world, I don’t see a reversal in the strength of the U.S. dollar anytime in the near future.
The third part of the “what happened” question is general cattle market dynamics.
First of all, we are seeing a lot of calves come to market, and part of what we are experiencing is usual seasonal dynamics. Granted, this has been exacerbated by the global economic forces described above.
The second major fundamental is that we have seen a rather quick expansion in the national beef herd. Most people saw the overall price peak looming, and we may have just experienced it. Granted, if the global situation rights itself, and we see an uptick in global demand, we may very well get back to record highs next year. But sooner rather than later we will begin to see cattle prices drop to more normal levels.
The answer to “will it get fixed?” is tricky – partly because the global economy is still rather shaky and the market tends to overreact more to bad news than good. It’s hard to tell when we’ll get back to normal. I don’t think we’ll see a major weakening of the U.S. dollar anytime soon, but watch what the Fed does, as any news about interest rate changes will have at least some short-term impacts.
As for the feedlot predicament, it appears as though feedlots are beginning to purge the heavyweights, but that process will likely take a few more weeks to months to correct. Most of the reports I’ve seen suggest soft prices for at least three to four more months. Some producers may want to background calves for a while to try to outlast the storm, but when looking at BeefBasis.com there isn’t forecasted to be an upswing in calf prices in Wyoming until February, so there will be some risk with that strategy.
Also, according to the most recent drought monitor, found at droughtmonitor.unl.edu, a lot of Texas and parts of Oklahoma are creeping back into dry conditions. This will limit winter grazing opportunities, which will again limit demand for feeders. If Southern Plains grazing opportunities don’t materialize soon, more cattle will be headed for feedlots, which will keep pressure on calf prices.
If, on the other hand, that region gets some timely precipitation, there may be demand for feeders outside of feedlots, resulting in bidding up calf prices.
With that, I’ll leave you on a positive note. Even though prices are down, the current price levels are still well above any time in recent history, other than of course last year. The Livestock Marketing Information Center (LMIC) predicts another year of extremely high levels of profitability for the cow/calf sector nationwide. Granted, they have dropped their expectations a bit over the last month, but again, this year is poised to be one of the best in over 30 years, second only to last year. While the industry may be headed back towards some sense of “normalcy,” we should be able to enjoy the ride for at least a little bit longer.