A Few Thoughts by John Nalivka: Maintain the forward momentum
June 16, 2017
Although severe winter weather and wildfires wore pretty heavily on many ranchers this year, the prices across the market that have generally been a reason to smile. However, I thought it is probably time to follow up on my last article where I talked about profits across the industry. I preface these thoughts with – this is not intended as a doom and gloom outlook for the industry. Rather, just a few of thoughts on maintaining the beef industry's forward momentum.
The market's strength was not happenchance. It was the result of feedlots that are very current, carcass weights well below a year ago, strong exports, and solid U.S. consumer demand. Each of these market conditions can easily change and when coupled with increasing cattle numbers, I don't think I have to describe the likely impact on the overall beef market. Therefore, the goal would be to sustain the conditions that the industry has best control. The four that I have identified are important.
There are other factors but today, maintaining forward momentum rather than simply letting the market takes its course will at least require that 1) feedlots remain current, 2) carcass weight remain below a year ago, 3) U.S. beef exports remain strong, and 4) consumer demand remains relatively solid.
What will likely change the conditions listed above? Together, a feedlot's supply-marketing balance (how current they are), fed cattle prices, feeder cattle prices, breakeven prices, and weights go hand-in-hand. It doesn't take much to turn the tide of stability into problems. Prices go down, feedlots begin holding cattle and weights start increasing in short order. Compound that situation with high break-evens driven by high feeder cattle prices. Short term decisions and reaction quickly turns into a downward price spiral. High break-evens may not be the catalyst but they definitely compound the downward spiral. Breakeven prices are best managed by managing the first-cost of the feeder cattle going on feed rather than adding pounds to cattle already on feed. Furthermore, consumer demand for smaller cuts only further supports the case for smaller carcasses. And yes, I understand the economics of yield in the beef production.
Weights and industry break-evens are the key to forward momentum. In raising the yellow flag for both, I would submit that maintaining the current situation for the past five months will be necessary for sustaining profitability as the industry enters the second half of 2017.