TOP FARMER WEEKLY PERSPECTIVE 05/27/2022 BY BRYAN DOHERTY

Is a Bull Market Brewing in Cattle?

Recent Cattle on Feed reports released by the USDA (monthly) have indicated heavier supplies than expected. However, when digging deeper, you’ll likely find these supplies are in the form of lighter-weight animals and extra heifers in feedlots. Production is higher on ideas that more cows are being slaughtered. Pasture conditions have been miserable, with winter wheat in rough shape in the southern Plains this spring, and the northern and northwestern Plains regions remaining in a prolonged drought. With poor pasture conditions, the placement numbers are on the rise. More importantly, from a longer-term view, additional cow slaughter implies producers are reducing the herd. It is a risk to feed $8.00 per bushel corn when they could sell it and have cash in hand.

In recent months, China has had a severe lockdown in multiple metropolitan areas. These have an effect in two respects: one is reduced imports of goods (beef) and the other is perceptive in nature. Markets often move on perception, so if there is a belief that China imports will be on the decline, futures prices will react. This, in part, is what may have contributed to the most recent price decline when June live cattle futures dropped from over $142 per hundredweight to less than $132. From a big picture perspective, we anticipate that demand from China will continue to remain strong and rebound in the months ahead. Add to this the expectation that the cow herd will be on the decline in combination with a reduced heifer herd, and the longer-term supply side of the balance sheet points to higher prices. In May, the USDA indicated production for 2023 could be down as much at 7%.

The deferred futures contracts seem to have it right, currently trading near a $20 premium to the current cash and front-month futures contract. This premium reflects anticipated tighter inventory into the winter months as well as increased demand. General expectations are that COVID, mostly worldwide, will continue to be on the retreat or (at a minimum) have a smaller impact than has recently been experienced. As the world continues to grow, so will the need for food. Food is becoming a more talked about topic, as the media is picking up on what farmers have known for years. That is, food is supplied by farmers and profits need to occur to grow a cattle herd. Rising feed and fuel costs dominate the input structure for beef producers. Expect that live cattle futures could move back to all-time high prices levels established in 2014, topping $170 per hundredweight. This may take more than a year. With food shortages forecast, inflation, and the reality of tighter and tighter supplies, it becomes more relevant that futures prices could exceed $170 by the end of the year.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Author

Bryan Doherty