Year-end cattle market review and 2009 forecast
December 30, 2008
As we finish up 2008, what a year it has been. The collapse of Wall Street and the impact that had on the commodity markets was likely what most people will remember. But before that occurred several commodity markets also reached new historically high prices.
The Dow Jones Industrial Average started the year around 13,000. It trended lower for most of the year amid growing concerns for the overall economy. In October and November it dropped sharply and became extremely volatile. It closed around 7,500 in mid November, before gradually climbing back to around 8,500 at the end of the year.
Crude oil prices started the year around $95 per barrel. Those prices increased to record levels of $145 per barrel in July. However, as general economic concerns increased and more people became convinced we were in for an extended recession, oil demand and speculation of future oil demand evaporated quicker than water in the Arabian desert. Oil prices ended the year under $40 per barrel, equivalent to price in 2004.
One thing that became apparent this year is that corn prices and oil prices are directly linked through U.S. ethanol, I mean energy, policy. Corn price began the year around $4.50 per bushel. The price rose to over $7.50 per bushel in June. However, with falling oil prices, corn also experienced a significant adjustment. By the end of November, corn was priced under $3 per bushel before rebounding to back over $4 per bushel to end the year.
Choice box beef prices started the year just over $145 per cwt. In July, prices were over $170. Prices had not been that high since the fall of 2003 when cattle trade with Canada was banned. However, just as Wall Street, oil and corn fell, so did beef prices. By December, Choice box beef was under $145 per cwt.
Fed cattle price started the year just over $90 per cwt. with considerable optimism for higher prices for most of the year. Prices did trade over $100 in July, but then like the other markets, they have gotten ugly this fall. Price in October and November were in the low $90 range and has now fallen to the low $80’s to end the year. Buying feeder cattle and corn at the average market price and selling fed cattle at the average market price was not profitable in 2008. Feedlots likely lost over $100 per head on average for 2008. Those losses resulted in lack luster demand for feeder cattle in the fall of 2008, particularly for lighter weight feeders.
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Feeder cattle prices held together quite well for the first seven months of the year at levels similar to 2007. Then prices declined rather sharply into fall and winter. Nebraska feeder steers, 750 pounds, were at $100 in January, increased to near $120 in August, and at the end of December had declined to under $95 per cwt. Steer calf prices, 550 pounds, started the year at $120, increased to over $130 in August, and then fell to under $110 by December.
Looking ahead to 2009, I don’t have much of a clue what will happen to the general economy. However, since the national media will no longer have President Bush to kick around, and since they are enthralled with President-elect Obama, it is likely we will see far less negative economic news reported and far more positive news reported. Because many people will therefore think the economy is better, they will start acting that way. In other words they will spend money they don’t have so that we can be set up for another economic crisis sometime in the future. But, I digress. Why this is important, is I think the stock market will become less volatile than it has been the past three months and that will calm fears in the commodity markets. When that happens, each commodity will again be trading based on its own fundamentals rather than all markets being lower because the stock market was lower on a given day.
So, if we assume that I am right about the stock market stabilizing, then here is my outlook for corn and cattle in 2009. Corn prices will remain volatile. In the past, corn prices hovered around commodity price support levels only occasionally spiking up due to a severe drought or perhaps a substantial increase in exports. Prices will remain well above the price support level and will continue to be influenced by oil which will all lead to greater volatility than what was seen a few years ago. Prices will likely average in the mid $4 range but I would not be surprised to see prices move $1 lower or $1-2 higher within the year.
Cattle on feed numbers are below a year ago, and the cow inventory declined in 2008. From a supply side, fed cattle and feeder cattle prices should be higher. However, with the economy in a recession, consumers will likely buy less high priced beef. Furthermore with a stronger U.S. dollar, our exports may decline in 2009. These two factors will pressure fed cattle prices lower. With the large losses feedlots have occurred, I don’t expect them to chase feeder cattle prices higher anytime soon.
So here is my crystal ball cattle outlook: fed cattle should strengthen into the upper $80’s and trade in the low $90’s for much of 2009; Nebraska 750 pound steers will likely trade in a range of $95-105; and fall 2009 calf prices may only be slightly higher than 2008 prices, or around $110-115 in Nebraska.
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