A Few Thoughts by John Nalivka on markets heading into 2023 – downside?
The stars are aligning – feeding margins are positive and cow-calf margins are headed toward a replay of 2015. And, while not necessarily positive, I might add USDA is now positioning to manage the industry toward long-term prosperity by “investing” in new programs. The question is whether the eventual outcome will be as expected. While I am on board with the optimism for the market going forward, I do think it doesn’t hurt to consider the potential pitfalls.
Cattle numbers are declining sharply. We can all see that, unless there were a lot more cattle in the country at the beginning of 2022 than we thought, suggesting that this year’s liquidation won’t have as much impact on cattle numbers as we head into 2023. I definitely don’t think that will be the case. Beef cow slaughter through the end of August at 2.7 million was up 14% from a year earlier and the highest since 1984. Heifer slaughter for the same period was up 5% from a year earlier and the highest since 2004 with year-to-date average carcass weights record high. I don’t think there is any doubt that the current cattle cycle favors the market as 2023 approaches.
So, what’s the downside? My concern is the state of the U.S. economy and what people are willing or able to pay for beef. There is no doubt that there has definitely been a positive shift in demand over the last decade and that is expected to work in the market’s favor. However, Americans are faced with the highest price inflation since 1981 that is largely driven by rising energy and food prices. And there is mounting evidence that they are already adjusting spending. The current retail beef feature rate of 65% may be telling as price conscious shoppers who do want to buy beef are more aware of the best buy. Also, the beef cutout has been under pressure and an indication of current seasonal market sensitivity to both supply and demand.
So, what about the sharp increase in export demand? There is no doubt that beef export demand is a major factor in the market today with July exports up 3% from a year ago and year-to-date 7% above a year ago. While I would not downplay that strength continuing into 2023, there is again the issue of price. Higher beef prices resulting from less supply will be further strengthened in the export market by a strong dollar which is up 10% from a year ago. How that plays out remains to be seen.
While I am not downplaying markets into 2023 and the opportunity for significant financial gain at the ranch level, I do emphasize assessing factors that will pose downside risk to that market, including relatively high costs of production, and managing that risk accordingly. Strong markets don’t always lead the way to stronger markets.
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