Better Farming - November 2016

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Better Farming November 2016 FarmNews First > 35
MOE’SMARKET MINUTE
Are we past the strong headwinds
in the beef industry?
Wild swings have been the
norm in the beef industry
over the last 10 years, as it
was forced to adjust to severe economic
shocks, such as multiyear droughts,
surging feed prices, etc. Per capita beef
demand is acutely related to the health
of the economy. Owing to a 12-year
trend of declining cattle herd size in
North America, beef prices started
rising - but this situation came to a tip-
ping point in 2014-2015.
Since then, U.S. cattle inventory
rose, from 29 million head in 2014 to
over 31 million head projected for
2017. U.S. beef production is project-
ed to top 26 billion pounds in 2017,
up from just less than 24 billion
pounds in 2014.
But as cattle operators responded
by increasing herd size, they found
that the feedlot/slaughter industry
had already downsized and, as a
result, the price for cattle dropped.
Reports of feedlot liquidations and
bankruptcies have been in the news
recently, highlighting that the
industry has quickly switched from
expansion mode to liquidation
mode. The United States Department
of Agriculture’s (USDA’s) September
2016 Cattle on Feed report showed
that the number of U.S. cattle on feed
(on feedlots with a capacity of 1,000
head or greater) at the start of
September was 10.1 million head.
This total is a one per cent increase
over last year. This year’s calf and
yearling prices are well short of 2015.
Every semi-trailer load of calves
is worth roughly $30,000 less than at
the same time last year. Despite
sharply lower feed costs, projected
cattle operators’ break even prices
continue to decline. Lower cattle and
feed prices are also causing some cat-
tle feeders to add more weight and
look for better pricing opportunities.
Though cattle producers are
getting less for beef, retail prices are
not dropping accordingly. Indeed,
retail prices are expected to remain
high. Foodservice demand, which
over the years has become an
increasingly critical driver for the
meat industry, has been weakening.
The Restaurant Performance Index
has been steadily declining since its
peak in 2014. The customer traffic
index decline has outpaced the
broader index. The number of
customers walking through the door
of American restaurants is lower
than a year ago.
The beef supply glut has caused
managed money funds (speculators)
to stay on the sidelines. Compared to
early June 2015, net buy positions in
feeder cattle at the Chicago com-
modities exchange have dropped by
13,864 contracts and are in negative
territory now. On live cattle, the
reduction in length has been by
71,626 contacts for the same time
period.
Finally some good news for cattle
producers and the North American
beef industry, as China’s Ministry of
by MOE AGOSTINO and ABHINESH GOPAL
Having survived the downside on cattle prices, we may be headed towards an upward move
- but it may take some time.
Source: U.S. Commodity Futures Trading Commission and Risk Management
Note: the contracts are of 40,000 pounds each.
# of contracts