Shootin' the Bull about the need for cattle

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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6/07/2024

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Live Cattle:

In my opinion, the weight of the cattle industry is on the shoulders of the cattle feeder.  Consumers have made multiple shifts in discretionary spending over the past 12 to 16 months.  Higher costs of everything limit the spending abilities of those working and cuts have to be made in order to live within one's means.  The sharp increase of demand for the grind is believed direct evidence of the consumers' shift in how they consume beef and what they are willing to pay for it.  The packer has shifted multiple times as well.  Slowing the slaughter pace brought a twofold benefit to the packer. One, it decreased the amount of beef produced, keeping box prices elevated, as well as, gave cattle on feed a longer time frame to grow, producing more beef.  These shifts have been noticed and are believed entrenched until the economy improves or worsens. That leaves the cattle feeder, who hasn't shifted at all.  If they did, it was towards greater vertical integration and not noticeable to any extent.  What we haven't seen though is a shift that impacts the price paid for incoming inventory, or the spreads between starting feeder and finished fat. Cattle feeders continue to bid higher, pushing the profit margin deeper into the red.  So far, the cattle feeder has laid in cattle for August and October slaughter at the highest prices for the year in the feeder cattle market and only a fraction from the high of last year.  As beef production for the year is equal to or no less than a percent lower at times than last, to still be trading feeder cattle at historical levels seems like a very fragile sheet of ice to walk across. 

"But there are going to be fewer cattle the further down the road we go!"  That may or may not be the case.  Liquidation is believed to have slowed to a point in which there is a balance of no further liquidation, but no expansion yet either.  The "if" for the moment is, if we continue to ration beef to the consumer, continue to grow cattle larger, continue to increase the dairy/beef cross supplies, and continue to export less and import more beef, is there a need for more cattle?  Probably not.  Rationing teaches consumers how to live without something.  As hard of a road the cattle/beef industry has traveled; to increase beef demand, the objective today is to ration it.  The longer it is rationed, the longer consumers know they can do without.  Were the economy to shift into a position where more cuts are affordable than the grind, then I could see demand coming back.  I'm seeing more consolidation in production.  Older cattlemen are bowing out and that is allowing for younger ones to grow in this business.  More consolidation is expected and I have a firm belief that if you are going to continue to be in the cattle business, you will need to grow and not become complacent with where you are.  In a dying industry, like the futures and options retail brokerage business, you have a lot of opportunity to grow as others leave the industry.  The same is in the cattle industry.  Some cattle you will get by default as others exit.  Some cattle will come from the hard work of raising them on your own farm and growing.  What most business classes will teach you is that growth is a necessity in any business due to unforeseen circumstances and inflation.  The more diversified you become, the less the unforeseen circumstances will impact you.  The inflation is inevitable when considering history, so keep building.  Managing risk is a key to staying in business and neither futures nor options will help all the time. However, they can be crucial, along with LRP, to help mitigate some of that risk.  I perceive the industry wants to pursue further vertically integrated supply chains that will look similarly to hog production, just not all under one roof. The larger you are, the more likely you will be asked to join.  In the interim, keep in mind that in order to achieve the vertically integrated supply chain in hog/pork production, the price was sold off to $10.00cwt.  Few could manage the risks of such low hog prices and high input costs.  In the cattle market, it appears going to take place at the opposite end of the price scale.  That being, the higher the price, the fewer that can afford cattle or beef.  As well, were there to be a market crash, for whatever reason, everyone is long at the top at the moment.   As all eyes are on the cattle feeder to see just how much more risk they want to assume to produce a pound of beef, about all you can do is root for them to get the higher price, because if the cattle feeding sector of the industry decides to shift in a manner to bring profitability into their realm, it would lead me to expect a sizable decline in feeder cattle prices.   

Outside markets have been exceptionally volatile after the Memorial Day weekend.  Bonds were overly active and have yet to subside with Friday's price action sizable. Energy resumed its down trend and grains as well.  I believe corn and beans to be in a bear market.  I think farmers have been very lax in marketing and that is expected to catch up to them sooner than later. After 3 & ½ years, Biden finally is shutting the door he opened on immigration.  The damage done is believed irreversible with only a small percentage estimated to be acclimated into an American tax paying, productive citizen.  

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