October 21, 2008


US cattle markets caught up in financial crisis


Due to the financial crisis of 2008, the US agriculture is in a stage of uncertainty and the cattle industry is no exception, as both domestic and foreign demand for beef is related to consumer incomes. The cattle prices are plot in the direction of the US and world economies, therefore as a result, beef supply fundamentals seem less important to prices for now.


It is no surprise that concerns over a downturn in the US and world economies have been the headline news from Wall Street to Main Street to RFD America in the past three weeks. The stock market, as measured by the S&P 500 index, was down 23 percent from September 26 to October 17. The impact on the cattle market was robust as well and with December, lives cattle futures falling 10 percent and the price of finished cattle falling US$8.50 per live hundredweight.


The recent financial losses for the cattle industry were particularly large for feedlots that did not have the remaining cattle sold, especially those who had purchased high priced calves and high priced feed this past summer. The most likely group in this category is small farmer feedlots as many large commercial feedlots have a greater tendency of having cattle forward sold. The negative financial impacts on cow-calf producers has somewhat been less in recent weeks as November feeder cattle futures fell only 7 percent.


Looking forward, the current decline in feed prices has been a huge advantage in reducing costs of finishing cattle and helped to maintain the declines in calf prices. Feed prices have fallen by a much larger percentage than cattle futures. During the last three weeks, December corn futures fell by 25 percent, with December soy meal futures down 20 percent. 


Consumer incomes determine beef demand and cattle prices. The current financial crisis may reduce those incomes and therefore cattle prices. The magnitude of the decline in incomes will influence the magnitude of decline in cattle prices. The last two recessions of the US were very mild. This recession may be more severe like the ones in 1974, 1975, 1981 and 1982 where Gross Domestic Profit (GDP) dropped near 3 percent. A drop of that magnitude this round could have a $4.50 to $5.00 per hundredweight negative impact on live cattle prices, not as much as prices have already dropped.


This indicates that live cattle futures decline of $10.25 per hundredweight over the past three weeks is too much and is probably true if real GDP drops only 3 percent or less in an oncoming downturn. However, as many  experts have stated, this is the worst financial crisis since the great depression. Theses statements suggest the possibility that the downturn would be greater.


The leading indicator for the cattle sector right now is probably the stock indexes. If there is a general improvement in global financial concerns, it will be reflected in stock prices. Indicators today say that the credit crisis is easing somewhat and money flow between banks is beginning to improve. The odds of a financial collapse are now somewhat lower as the governments of the world major economies have pledged to make sure a situation does not occur. 


Odds favour a recession and not a depression, therefore understanding the magnitude of the recession as it unfolds will reveal the impacts of the past few weeks that affect consumer's spending, business investment decisions and trade. Markets often anticipate the worst and if it does not occur, there is some recovery. This might be the direction for the cattle markets as it would enable cattle prices to recover several dollars per hundred, noting that feed prices would be expected to raise as well.


Buying feed at this point of time is a consideration of both a harvest and financial crisis weighing on grain prices and it has to be done with a view to the risk bearing ability of the individual firm. During these times, locking in feed costs without pricing output leaves one in a vulnerable position if the recession is worse than anticipated. Taking positive measures by establishing both input and output prices is advisable.

For cow-calf operations, a similar calm attitude is probably the best path. The feed price highs are probably behind the industry, at least for now and the world economic crisis may not come to attainment. The world governments have administered a huge amount of stimulation to economic activity both by infusions of capital and in monetary policy. That large stimulation will probably have the result of moderating recessionary pressure now, but also in stimulating more inflation in commodity prices over coming years. 


Recovery in finished cattle prices to the low-to-mid US$90s would seem to be the most likely possibility in coming months. A recovery of US$5 to US$7 per hundredweight might be expected for feeder cattle and calf prices as well.

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