TOP FARMER WEEKLY PERSPECTIVE 11/18/2022 BY BRYAN DOHERTY
Expect Tighter Supply of Cattle in 2023
Though cattle marketing numbers were heavier than expected late summer and fall, expect that beef production and the number of cattle marketed will be lower in the year ahead. Why? The quick answer: higher input costs and drought conditions in key cattle-producing states will mean less inventory in the months ahead. The not-so-quick answer: this trend has been in play for some time, as the key cattle-producing states have struggled with drought and poor pasture conditions. The western and southwestern regions of the Midwest (in particular, winter wheat areas) have been plagued by continuous dry weather. The result is a winter wheat crop that has experienced slow emergence and is a poorly rated crop at only 32% good to excellent. The poor to very poor rating is also 32%. This implies more cattle to feedlots sooner than usual, as they will not be pasturing on winter wheat. These cattle will move through the pipeline sooner and, consequently, less beef will be available down the road. In essence, feedlot numbers on Cattle of Feed reports will likely show larger placements and marketed cattle this fall and early winter, and less cattle on feed in late winter and spring.
Ultimately, shortfalls of heifers and a lack of financial incentive to build the herd leaves a trend of lower supplies. Until input (feed) prices decline, expect this trend to continue. Tight inventory will keep live cattle prices supported. However, unknown is the consumer’s willingness to pay higher beef prices in an inflationary environment. Our best guess is maybe, and probably not. Demand worldwide in 2023 is expected to slow according to the most recent projections from the USDA, as economic slowdowns continue.
The result: producers should experience supportive price action on futures with limited upside potential. Deferred cattle futures contracts have rallied and have factored in tighter supplies, trading in the mid to upper $150s. If demand is better than expected, then perhaps cattle futures trade up to $175. The key to higher prices is demand. Demand is difficult to project and is a constantly moving target.
To guard against lower prices, producers can purchase put options to establish a price floor and leave the upside open for price advances. If wishing to collect call premium to offset the put cost, consider selling out-of-the-money call options. This is called a fence strategy – a position where you lock in a fence of prices. The put provides a floor and the sold call could be exercised into a short futures (hedge) at the sold strike price. Consult with your advisor for details and risks associated before entering any position.
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.