Think risk management with heightened uncertainty in market outlook
June 29, 2018
If only every year in the cattle industry could be as easy as 2014 or 2015! Risk management was having cattle to sell and then talking to your accountant at the end of the year about tax strategies! Cow-calf operating margins hovered around $500 / head while cash feeding margins were around $200 / head Packers faced with record procurement prices for cattle which fed upstream cattlemen and feeding profits, realized only a little more than breakeven margins. That was an exceptional year and one not likely to be repeated. So, four years and 6 million more cattle later, the industry faces the economics of record beef production not to mention record or near-record total meat supplies. I am projecting cow-calf margins, feeding, and packer margins for 2018 at $125, $50, and $138 per head, respectively.
Certainly the importance of risk management or reducing variability while increasing predictability for all aspects of the business have increased for cattle production including cow-calf and feedlots. Market analysis deals with both the variability and predictability of that equation and in focusing decisions on both, we attempt to close the gap between certainty and uncertainty.
While markets wrestle with supply generated from the largest feedlot inventory since 1996 when records began, demand is relatively strong and so far, has partially offset the downward pressure on prices. Numbers are one thing, but under the current circumstances, the potential exists for carcass weights to increase. YTD, they are 6 pounds heavier than a year ago and packer capacity and feedlots remaining current will be the key to weights going forward. Increased cattle numbers are likely to last well into August and demand will be relied upon to limit the extent of price erosion on fed prices.
Cow slaughter through mid-June remains the highest since 2013 when producers were liquidating herds. Beef cow slaughter year-to-date is up 11 percent from a year ago while dairy cow slaughter is nearly 5 percent higher. At the same, beef cows are representing a larger share of the cow slaughter mix. My current projection for cow slaughter (+4 percent), suggests producers would cull about 15 percent of the January 1 cow herd, the highest since 2013 and the last year of herd liquidation that brought the U.S. cattle inventory to the lowest tally since 1952. At the same time, heifer slaughter year-to-date is up 8 percent from prior year. At a minimum, herd grow has stalled while the likelihood of herd liquidation has increased. Think what that means for prices going into 2019 / 2020 – if you have cattle.
The last ten years in the beef industry supply chain have valuable lessons that can be applied to risk management strategies going forward – that is producing the "right cattle for the right market." The "right" market is a branded market that requires a dependable flow of cattle with the right specifications for the customer with quality at the top of the list. How better to manage risk than a simultaneous buy-sell transaction with a premium attached?! Are you one of those suppliers?