Cattlemen challenged with volatile market

SPRINGFIELD, Ill. — A volatile cattle market is impacting cattlemen during the coronavirus pandemic.

“When we are talking about price and transparency issues, those are two different topics,” said Don Close, vice president of food and agribusiness research and animal protein at Rabo AgriFinance.

“Price is a cyclical issue driven by supply and demand,” said Close during the Cattlemen’s Education Series organized by the Illinois Beef Association. “Transparency is the visibility and understanding of the entire price discovery process.”

During the debate about cattle prices, Close said, one area has been often overlooked.

“From 2014 to present, we’ve added about 6 million cattle to the total inventory,” he said. “About 3 million of that are cows and 3 million are the offspring of the cows and we’ve seen the traditional annual increase in average carcass weights.”

When that much inventory is added to the existing limits on slaughter capacity, Close said, it comes at an expense to the cattle feeder.

Close created a live cattle leverage index.

“This is the ratio of the weighted average cash price or cash equivalent of all sales types divided by the cutout plus drop,” he said.

Starting in 2002, there was an extended period of time that the index was at $100 or better, Close said.

“From 2013 to 2014, the cattle supplies were tight so the index was at or about $110 and there was solid profitability throughout the industry,” he said.

From 2015, as the industry repopulated, there was erosion in the cattle feeders’ leverage, Close said.

“That came to a short-term low in August and September 2019 following the fire at Tyson,” he said.

The cattle market was just starting to get back towards normal when coronavirus hit the United States.

“That resulted in a slowdown in slaughter that caused the 1 million head backlog in cattle,” Close said. “Not only do we have the supply from the 3 million head increase in cattle inventory, we have compounded that with the million head backlog.”

Close compared the cutout derivative price to the live equivalent price starting in 2002.

“The long-term average of these two price series is within 50 cents per hundredweight,” he said.

To evaluate different market prices cattlemen receive, Close used the live FOB price as a foundation and compared the premiums and sales types on average since 2002.

“The dressed delivered had a $2.08 per hundredweight decline, the formula live had a premium of $1.70 per hundredweight, the formula dressed had a premium just short of $3 per hundredweight and the grid dressed premium was $1.58 per hundredweight,” Close said.

“The cattle sold by formula dressed and grid deserve a level of premium to a conventional live FOB,” she said. “With a conventional live FOB transaction — weight times price equals dollars — the ownership of those cattle are transferred and all the risk for the cattle feeder is gone.”

However, with carcass merit transactions, the producer stands the risk.

“He’s dependent on those cattle performing well on a yield and grading basis and the discounts are at the risk of the producer,” Close said. “So, you should have some premium and price value.”

Using a cutout price to establish a base price would take a lot of burden off the packer, Close said.

“He’s not going to have the discrepancy that he’s favoring producers,” Close said.

“It would provide a base price that the packer could work with and you would still have the ability to negotiate around cattle quality and geographic differences,” he said.

With the current market environment, Close said, this is not the time to make long-term market altering decisions.

“It is too volatile of an environment to be able to make sound, long-term decisions,” Close said. “We need to let things calm down and return to a more normal environment.”

“I think the U.S. market is well positioned to be the quality beef supplier to the planet,” he said.

For more information about the Illinois Beef Association, go to: www.illinoisbeef.com.