Rising grain output, rising US cattle populations, struggling foreign currencies and declining populations in major consuming countries point to lower fed cattle prices in coming years, and traders appear to be adjusting.
Thursday, the Chicago Mercantile Exchange’s live cattle futures market close revealed that traders have serious misgivings about cattle prices down the road. The Oct delivery month settled at $142.55 per cwt, while Oct next year ended at $136.75, a 4.07% decline.
That indicates fear that the market will not be able to sustain the current rally. Traders could be wrong and fearful at the same time since the market is dynamic and subject to change, but for now, many investors appear to be taking a more cautious approach to the market.
Ag Resource president Dan Basse outlined several factors affecting the US cattle market and said long-term beef price trends in mature economies tend to follow population numbers. By 2040, he expected the combined populations of Japan, Europe and Russia to drop by nearly 100 million people.
THE GRAIN CONNECTION
Over the last 10 to 15 years, the US dollar has strengthened over other currencies as investors fretted over economic conditions there. The US had its own problems to be sure, but the greenback still was considered to be a comparatively safe currency. The result was a rise in value over time.
But that rise meant higher prices for grain buyers and an incentive for other countries to increase their grain production as world demand shifted their way. This was augmented by years of drought in the US and lowered production.
For instance, in 2000, the Black Sea region exported 4% of all wheat and corn combined, Basse said. Today the region commands 34% of the world’s wheat alone and determine world wheat prices.
Farmers in Brazil, Australia, Russia or elsewhere are not going to cut back on grain production to balance world supplies with demand. It then falls to the US to cut.
But if US grain prices are declining, the cattle industry must be expanding to take advantage of the situation. Cow/calf producers are seeing record profits, and while these profits are expected to decline, they currently are so high as to expect continued herd expansion for a few years.
Profitable times for feedlots are coming, and Basse expected it between the middle of 2016 and maybe up to 2018 or 2019 as feeder calf availability increases and prices decline.
However, he was troubled by the export potential for US beef, pork and poultry as a percent of the world’s total as exports of all US goods turns down and populations of major consuming countries declines.
It could take years for emerging economies like Pakistan, Bangladesh, Nigeria or India to underpin world demand for beef.
In the near term, Basse said he expected a fed-cattle market rally this year to near $160 per cwt but a falling away to the mid $130s by the first quarter of next year.
CASH FED CATTLE TRADE QUIET
Cash cattle markets remained quiet Thursday amid aloof buyers and concerns about beef demand.
Packer bids were $144 per cwt on a live basis and $226 dressed with asking prices holding at $150 live and $236 dressed.
Cattle last week were mostly $145 to $147.50 live and $232 to $234 dressed.
The USDA reported lower boxed beef prices Thursday with choice down $0.03 per cwt at $244.21 and select off $0.48 at $233.12.
The CME Feeder Cattle Index for the seven days ended Wednesday was $211.05, down $1.29. This compares with the Aug settlement Thursday of $210.00, down $0.27.