The beef industry is resilient, even stronger, despite a partial government shutdown

Looking back on the adverse effects of the government shutdown in other areas, the beef industry handled it just fine.  The private reporting services that cater to the industry were pretty accurate and the markets seemed very transparent, both on a wholesale level and retail level. I think it’s nice to know we don’t need the government for everything in our lives, though lately that theory is being sorely tested!

Profitability has returned to the industry with cattle closeouts last week showing up to $350/head profits.  The fat cattle market is on an $8/cwt (hundred weight) run in the last 6 weeks and when you couple that with a large reduction in feed expense you are finally riding the right side of the wave. The only negative in the news lately is that trace amounts of Zilmax were found recently in some beef shipments to Asia, specifically South Korea and Taiwan. Hopefully this issue will be resolved soon, because those beef exports are extremely critical to the long term health of our domestic cattle market.

 

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Government shutdown lowdown for our industry

With the advent of the government shutdown, there has been some confusion over the jobs of Federal Beef inspectors in packing plants. These jobs are considered essential to the public good and will continue uninterrupted.  This is good news, for if they weren’t, cattle futures would be in a steep decline right now. With all of this uncertainty unfolding around us though, it is hardly good for beef demand over time.  Federal price reporting of wholesale beef prices on the other hand is considered nonessential and has ceased, so it will be interesting to see how the price discovery process will shake out.  Hopefully, it won’t be to the cattle feeders’ detriment.  Cattle prices have risen slowly throughout the summer and fall, and some cattle are now making a profit. This is welcome news. Feed costs are finally coming down, which is also good news, though this is somewhat tempered by a rather dramatic rise in the price of cash feeder cattle.

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Rain on the plains

I am happy to see some encouraging signs of trend changes in the industry of late. The first one is the weather. There has been a rather significant amount of rainfall in the past month centered predominately in Southeast Kansas, as well as rather impressive totals here in Western Kansas.  This could lead to a greater amount of grazing cattle this fall, something that has been in a large decline since 2010. With the national cow herd at a 50 year low, that is very good news.  Keep in mind, though, a build up will take time – probably a minimum of at least 3 years and that’s just speculating. Nonetheless, this is a step in the right direction.

With the decline in the price of new crop grain, cattle feeders should be looking at some relief.  However, with the late maturity of U.S. planted crops, that relief realistically won’t arrive until mid-November.  With that said, I’m a little surprised at the recent run-up in cash feeder cattle values!  The actual cost of gains needs to be carefully evaluated, based on the late growing season we are experiencing.  It seems to me at least one-half of the next feeding period will consist of old crop corn and if we would suffer an early frost or freeze, well then Katy bar the door!*

Tyson’s announcement last week of its ban on Zilmax seems to have been bullish, at least initially, but with no follow up support from the other large beef packers, I doubt there will be any long term positive effects for the industry.  Packer margins look much worse on paper than they did a month ago, so let’s hope for an increase in both domestic and international demand.  We will need this demand to make the current turn of cattle we have on feed profitable.

 

*For those who are wondering, “Who is Katy?”  “Katy bar the door” is a colloquial expression meaning “look out” or “get ready for trouble.”

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Endurance is patience concentrated*

In my last column, I stressed patience concerning unfavorable cattle feeding margins. Well, it looks like my patience is going to be tested for quite a while! Margins continue to run in the red with little end in sight. The industry is going through one of its worst stretches of profitability; maybe ever.

 The price of feeder cattle is simply too high.  Feed yards know their cost of grain, so why bid feeder cattle to levels where they are starting at $60 to $100 in the hole on day one?  It’s like trying to undercut the competition just to get business while pricing yourself out of business.  This is obviously not sustainable.  We’ll just keep doing what we do well behind the scenes, ready to jump back into the race when the market bounces back.

 

*Quote by Thomas Carlyle

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Patience in the Industry

In my last column, I stressed patience concerning unfavorable cattle feeding margins. Well, it looks like my patience is going to be tested for quite a while! Margins continue to run in the red with little end in sight. The industry is going through one of its worst stretches of profitability; maybe ever.

The price of feeder cattle is simply too high.  Feed yards know their cost of grain, so why bid feeder cattle to levels where they are starting at $60 to $100 in the hole on day one?  It’s like trying to undercut the competition just to get business while pricing yourself out of business.  This is obviously not sustainable.  We’ll just keep doing what we do well behind the scenes, ready to jump back into the race when the market bounces back.

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Patience is key to long term success

We’re going through some very challenging times in the cattle feeding industry.  Losses have been sustained now for well over a year.  I believe the reason for this is an over capacity in the industry of roughly 20% to 25%.  This is usually the way the market weeds out the companies that will discontinue feeding.

Here at High Choice, we have made the decision to let pens remain empty, unless we can find feeder cattle that give us a realistic expectation of being profitable.  The industry mentality is that you need to keep all pens full all the time.  In my view, it is just not smart business.  Patience is the key to being financially successful for the long term in this Industry.  If the margins are not working for us today, then we will let somebody else own cattle and wait for a better opportunity down the road.  Cattle feeding margins will turn around; they always do.

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Technicals versus Fundamentals

The Ag commodity markets have become to me much more perplexing in the last couple of months. I consider myself more of a technical trader than a fundamentalist, but I will admit that at the end of the day fundamentals will eventually rule. Technicals will determine the route in which we get there though. Fundamentals affecting the Ag Commodities have changed dramatically in recent years. Large fund driven companies can move markets all by themselves. I believe so much so that these funds are a Fundamental all to themselves!  That said, I believe if you’re participating in markets that I trade in specifically like live cattle feeder, cattle corn and wheat, your fundamental outlook has to be worldwide in scope.

A specific example of this is the corn market here in the last week of October. What is driving it?  Well none other than the European debt crisis. I see very little correlation between the two, but it is what it is so you have to respect it. The world has shrunk dramatically in the last few years, so that now what is happening around the world while you are asleep is having a financial impact on your business here at home! The opportunities, but also the risks, have never been greater.

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The State of Commodities

Lately, the state of commodities seems to be mirroring the state of the rest of the world; namely incredibly volatile. The world and its happenings seem to affect just about everyone in some shape or form. I would submit the cattle markets are no exception.

The June 30 crop report provided some temporary relief for feed costs, but with the weekly December corn close on July 8, the relief could be short lived.

Many people are saying the need for risk management is stronger than ever. I would say that it depends largely on one’s risk tolerance. Risk management can curtail losses in volatile times, but unfortunately on the flip side it curtails profits as well. My personal bias.

Right now, there is more risk in the corn market than the fat cattle market.  With feeder cattle at contract highs, the need to be very careful with your purchases and feed needs is imperative.

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Our First Blog Post

For anybody involved in commodity markets, the last eighteen months have been a real whirlwind. The amount of money to be made or unfortunately lost is unprecedented. It really is a stark contrast to the meager returns offered by financial instruments (i.e. CD’s, treasury bills, money markets, etc.)  Right now, it’s a very exciting time to be involved in the business of cattle feeding. Agricultural commodities, specifically, have been affected by world circumstances never seen by anybody to date. We have a new middle class emerging in countries like China, India and South Korea that have upgraded their diet to include a much larger percentage of protein. This upgrade in diet can only come about with the importation of much larger quantities of meat from the U.S.
This has been a golden opportunity for people involved in beef production, specifically a company like ours, High Choice Feeders.

I’ve been engaged in the business of cattle feeding since 1985 and I’ve never been more optimistic about the future. Today is truly a global economy with huge opportunities for profit. I’ve heard a lot of lamenting lately over the high price of inputs and risk associated with doing business in this kind of environment. History has shown that over the years it is this kind of higher risk environment that produces the large profits we have seen in the last 18 months and hopefully well into the future!


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