Cattle feeders need to make a little money before they pour it back into the feeder cattle
Global currencies and commodities have fluctuated to the extreme recently. The collapse in equity markets spilled over to the commodities and beef was caught in the vortex. Then, as oil gained momentum, so did Canadian currency, again pressuring export beef prices. Bids on fed cattle basically levelled out as packers tried to flatten the erratic flight of the loonie, and feeder cattle stayed sideways.
It is becoming the norm to have global issues affect us close to home. The threat of economic uncertainty is reflected in consumer buying. In beef, we have seen the value of the grind (hamburger) carry a larger portion of the carcass value for over a year. When consumers backed away from spending, they chose cheaper cuts, which bit into retail sales. They also reduced their meals away from home, staying away from “white tablecloth” dinners. This flattened the potential within the market, (with the exception of this spring, when there was a shortage of live-cattle deliveries in the U.S. because of severe storms).
It is this continuous flat landscape that producers say they are so frustrated with. When the Canadian dollar goes down, their prices at the farm gate should go up. Buyers of fed and feeder cattle appear so weary of the fluctuation and overall threat of gains in the dollar that they have kept the prices flat. It looks like someone else is picking up some major margin on the cattle, but buyers are mitigating their risk, and yours, by staying steady in the market rather than jumping in and out.
In addition to the volatility in currency, there is the huge variance in live cattle futures. Every day on the Chicago Mercantile Exchange, traders, speculators, cattle feeders, grannies who play the commodities and a host of others take a buy or sell position and establish the market. Our Canadian price is derived from the CME “board.” When live cattle futures are under pressure, the cash markets reflect it. At the end of each trading month, the futures and the cash price converge, so it is certain that they follow each other. Within this market there are ceilings and floors. The ceiling or resistance for live cattle has always been US$100 cwt. In the past 30 years, the market has only reached or exceeded that level four times and it could not sustain itself.
This shows us just where the blocks are on the road to higher pricing. Indeed, the packer is reluctant to pay a US$100 cwt. or more for fed cattle because he is aware that it is not historically sustainable. The wholesale market is not favourable to it because the buy cost is high and the margin is low. Even retail is resistant to that price because of the cost of the beef.
Within this whole processes there are gaps and delays. The distance between the players in the beef industry is also very real and that results in lag times for pricing. Retail prices and food-service act independently of the cattle market because they are focused solely on beef. Their prices do not go down when beef costs them less and that is how they mitigate the demand risk. Boxed beef prices may rise but the lag in pricing may be up to several months before fed-cattle prices are increased by packers. Cattle feeders need to make a little money before they pour it back into the feeder cattle. And by record, they tend to split their profits, but they too have the cost of gain, interest and currency to deal with and thus the lag time before margin can be passed along. Throw into this mix the volatility and the dictatorship of the live-cattle futures, and one begins to appreciate the complexity of pricing of beef and cattle.
The short and the long of it is that everything that happens in the world today, is in someway influencing the value of beef and consequently the value of the cattle on your farm. These price gaps between producer and end user are indeed real, and so is the lag time in profit sharing. The solution is admittedly yet to be found, for at the end of the day, each is needed, including the guy who sells your beef at retail.
Brenda Schoepp is a market analyst and the owner and author of Beeflink, a national beef-cattle market newsletter. A professional speaker and industry market and research consultant, she ranches near Rimbey, Alberta.[email protected]