‘A Few Thoughts’ by John Nalivka: As the market heads into 2023, what if?
The New Year is upon us. For cattlemen, the best part of heading into this New Year is probably the long-anticipated beef and cattle market rally projected for 2023 and beyond. Hopefully, the drought is behind us. For many, the last 10 days of severe winter storms and cold has definitely not been much better.
The last two weeks of December only added to the enthusiasm as both the Choice and Select cutouts gained 13 percent since the beginning of the month. Not that market activity will repeat itself, but given that recent sharp jump in the cutout, I thought it would a good idea to take a look back in previous years at price movement from late December to mid-May and consider what this may mean for prices ahead into May 2023. I expect fed cattle numbers to begin dropping significantly into late second quarter of next year as we go into the grilling season.
The 13 percent increase in the Choice cutout from the beginning of December to the last week of the month compares to an 8 percent drop on average during 2015-2019. Obviously, the severe storms were partly responsible as cattle movement and plant operations were affected. For the month of December, the Choice cutout will average about $262/cwt. Looking back over 2015-2019, from December to mid-May, the Choice cutout on average increased 12 percent. If this were the case for 2023 and I wouldn’t necessarily rule it out, the May Choice cutout could gain to an average of about $293/cwt. I think a more realistic view would be $282/cwt., an 8 percent increase from December 2022.
So, projecting the Choice cutout at $282/cwt. and the Select cutout at $265/cwt., coupled with tighter cattle numbers, I think the 5-Area Choice steers would range from $165 – $170/cwt. Using a $168/cwt. steer scenario would leave the feedlot margin at $195 per head against a projected breakeven of $154/cwt. This breakeven has a 750-800 # feeder placed this month averaging about $177/cwt. with a $725/hd. cost of gain. The projected packer margin would be $0/head in this price scenario. While this may be a likely scenario, this is one scenario and many factors can change the outcome over the five-month period.
I continue to emphasize the importance of risk management. Taking a look back to project possible outcomes going forward is part of risk management. Making sound decisions with regard to that information and modifying those decisions as the need arises is the other part. While the supply scenario going forward seems fairly solid and would support a sharply higher market, there is still risk posed by the uncertainty of other factors that play a role in the market. Consider and manage that risk and just as important, have a great New Year!