Great expectations realized
April 9, 2010
Two years ago I wrote an article entitled Great Expectations about the cattle market. In the classic novel written by Dickens with that title, the main character’s great expectations are continually dashed by real world experience. I wrote of cowboys expecting higher prices, the futures market promising those higher prices, “experts” almost guaranteeing those higher prices, and yet lower prices occurring at sale time. Instead of positive cattle feeding returns, which were expected at cattle placement, large losses occurred. However, is this the year those great expectations for positive cattle feeding returns will be realized?
I must admit that I was skeptical at the start of the year when I saw April Live Cattle futures priced over $90. I thought the market may be playing another cruel April Fools joke on cattle feeders, and that by April $90 would only be an illusion. I believe in more than one extension meeting, I said that in spite of a tight cattle supply situation, I would be surprised to see many cattle sell for over $90 unless demand also improved. Perhaps my pessimism was born of unfulfilled optimism from the last two years. However, the last seven weeks, the 5-market live fed cattle prices have average over $90 per cwt. each week. Some loads of cattle have sold for over $96 per cwt. during this time frame. Those are the highest fed cattle prices since September 2008. Those prices have certainly exceeded my pessimistic expectations.
Let’s do a quick review of history. In 2008 and in 2009, the APR LC contract declined about $10 per cwt. from expectations in November of the prior year until the following April; hence, great expectations unrealized. However, this year the APR LC contract has gained $10 from November until now; great expectations surpassed. Instead of losing $50-100 per head on cattle sold, as has been the case for most of 2008-09, feedlots are seeing a $50-100 per head positive return on cattle currently being sold.
What is different this year from the past couple of years? The number of cattle on feed, and fed cattle marketings are below year ago levels. Fewer cattle to sell implies fewer pounds of beef and this tight supply has supported higher prices. However, this was also the case a year ago and the year before that. Cattle numbers have been declining. However, unlike like a year ago, there has not been another outside negative factor impacting the market. A year ago, the stock market was near the bottom for this current market set back. That pessimism in the general stock market was dragging commodity prices lower as well. Since that time, there has been steady improvement in the stock market. Now, I don’t want to imply that all is well in the good old US of A. Unemployment numbers have not improved and many consumers are still looking to save rather than spend. But, I think there is less gloom and doom then there was a year ago at this time, and that has likely helped or at least not hurt, beef demand.
Demand is hard to measure in real time. It will be a few months before economists can say much about current beef demand. However, look at current box beef prices. Choice beef prices were under $140 per cwt. in December 2009. For the first week in April, Choice beef prices were over $163 per cwt. That is the highest Choice price since July of 2008. While supply of cattle and beef remain relatively tight and this is the main force behind higher prices, I also believe that demand must have strengthened for these higher prices to have been realized.
It is amazing how fast things can change in the cattle industry. With the positive change in box beef and fed cattle prices, and the fact that corn prices have been declining and expectations are for large corn plantings, feeder prices have also surged higher. Prices for 550 pound steers in Nebraska the first week in April were at $133 per cwt. That is the highest price since the early fall of 2007. This time of year always brings optimism in cattle country. Since the first of the year, fall feeder cattle contracts have risen from around $100 per cwt to $115 per cwt. in early April. If those prices are realized this fall that will be an increase of about $20 per cwt over the last two falls, or an additional $100 per head on a 500 pound calf.
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Perhaps the memory of the last couple of years is still too fresh in my mind. I would advise producers to watch this market rather closely. If weakness starts to show after the spring rally has ended, it may be a good time to take advantage of these higher than expected prices.