One of the favorite items I’ve accumulated during my eight years with the cattlemen is a classic piece written (framed and autographed) by the iconic Baxter Black on August 1, 2005, titled Bad Time for Economists. His last paragraph is what I’m reminded of when I’m asked to pontificate about the cattle market during a particularly unsettled juncture. It goes:
“Which leaves the economists, brave and true, behind the eight ball. When I think of economists in today’s unsettled time, I’m reminded of that weatherman on the Weather Channel broadcasting live from Hurricane Ivan; the economist clinging to a light pole, feet off the ground flying horizontally, fighting for his life and talking on his cell phone.”
Five and a half years later, I’m sure Baxter wouldn’t have imagined live cattle futures trading at an all-time high of $120 per hundred weight (cwt), feeder cattle futures above $130/ cwt, $7 per bushel corn, bred heifers trading from $1,500 to $2,000 and cull bulls fetching a buck a pound at auction. Everywhere I turn, from cattlemen at state and national meetings, to bankers, and even other commodity analysts, folks are all wondering what all this means and what we’re going to see next.
This confusion is being driven by the sheer multitude of variables driving commodity markets so far in 2011, all of which seem to be pulling these markets higher. Before this crop year is finished, we’re likely to see the tightest stocks-to-use ratios in history for both corn and soybeans. A miserable Black Sea region wheat crop last year coupled with China’s seemingly insatiable need for U.S. soybeans, a looming disaster with the Chinese wheat crop and flooding in Australia are all working in conjunction with booming Asian economies and a weak dollar to drive prices higher.
The “cheap” U.S. dollar also means the United States is the market of last resort for Australian, New Zealand and Uruguay lean grinding beef that mainly goes into the production of fast-food hamburgers in the United States. This is why U.S. beef imports fell dramatically during the last half of 2010 to a point where the United States was a net beef exporter for the first time in history. It should also be noted that this lean “grinding” beef mainly comes from cull cows and bulls, of which there is certainly a limited supply globally. In fact, we might already be seeing the next move up in these prices as U.S. cull cow slaughter has declined by 30 percent during the first five weeks of 2011. This is obviously in reaction to the market signaling the potential for greatly improved profitability for the cow-calf sector.
It doesn’t stop there. The February 2011 live cattle futures contract has experienced an unprecedented appreciation of $20/cwt since June. There is no question that exports have been the driving force behind the almost linear rally in cattle prices. Wholesale prices for chucks driven by Asian demand and rounds driven by Russian demand, along with a very strong drop in credit and lean trim prices, have wholesale beef cutout values hitting on nearly every cylinder. The only missing piece remains domestic demand for middle meats (steaks), which can’t seem to get a foothold due to high U.S. unemployment. Despite the fact that we’re still missing roughly $1 billion in exports to China and Japan due to bovine spongiform encephalopathy related market access restrictions, the United States exported a record $4.08 billion in beef and beef variety meats in 2010.
Such significant fundamental signals across a broad spectrum of commodities strongly suggest that these cattle prices are not a one-off or a bubble. Worldwide events in recent weeks all share a common thread – the demand for food and fuel. As CattleFax’s Randy Blach rightly points out, these inflated deferred live cattle futures are a reflection of corn futures. After cattle feeders lost $7 billion in equity during the previous jump in corn prices, it appears that the marketplace has figured out that cattle will not be placed into feedlots unless deferred live cattle futures provide the opportunity for profitability.
Arguably, the most important person in this entire conversation is the banker. In the present environment, it is critical that bankers and bank regulators understand not only that increased risk and volatility has been injected into the system but that when commodity and input prices rise 20 percent or more it also means that 20 percent more money is necessary just to do the same thing as the year before.
What other factors have the potential to alter the equation? Any response should include a discussion about pending state budget shortfalls in several key states including California. At the federal level, the critical nature of this nation’s deficit cannot be overstated. We must get a handle on it, no matter how painful. Fortunately, we finally appear to have a group of legislators in Congress who seem to be willing to run headlong into this quagmire.
These are certainly exhilarating times for farmers, ranchers and even us economist types. No question about it, we’re all going to need to hang on as we talk on our cell phones, feet off the ground flying horizontally. Handwritten at the top of Baxter’s article is some sage advice: “Invest in a slicker!”
