Partnering could be an option if feed is in short supply

There’s a lot of volatility in cattle markets right now and that could open the door 
to some ‘interesting value propositions,’ says expert

A shortage of feed and a dry start to the grazing season may make it worthwhile to investigate some retained ownership or other off-farm feeding opportunities, says a risk management specialist with Alberta Agriculture and Forestry.

“For some producers who may not have sufficient feed carry-over to sustain their production plans, moving yearlings or replacement heifers to a feedlot for a period of time may be a good option to help buy some time for the grass to grow or recover,” said Bruce Viney. “Purchasing hay can also be a good option, albeit rather expensive. Outright selling of some cattle can bring in some instant cash and help take some stress off the grass, but there is always the uncertainty of the market of the day.”

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Market volatility can offer both downside risk and upside opportunity, said Viney.

“Given the recent rapid decline in cattle prices, producers are encouraged to talk to a market analyst and formulate an opinion on the markets,” he said. “Along with that market opinion there needs to be a plan, just in case it turns out wrong. It could be that there is an opportunity to capture some upside market potential.”

The extremely high 2014 prices were exaggerated by feedlots holding back the supply of cattle in hopes of achieving higher prices, he said.

“That strategy worked very well for a long time, but one consequence was extremely heavy carcass weights that added even more pounds to the supply. Ultimately, the rising retail prices ran up against resistance at the consumer level, and the highs were made. With the futures price highs in place, the market began to anticipate expanding cattle numbers, and weakening demand due to the global economic slowdown. This anticipation initiated a downtrend and generated one of the strongest basis conditions on record. A strong basis is simply a situation where the futures prices are much lower than the current market price.”

With the new combination of lower futures prices, lower feeder cattle prices, and mounting financial losses, feedlots have since had a financial motivation to aggressively market their heavyweight cattle and replace them with new feeder cattle inventory, he said.

“In particular, U.S. packers have increased their production dramatically in response to their own higher profit margins. Wholesale meat prices have dropped and it’s expected that retail, and weekly special beef prices will also come back down to more competitive levels fairly soon. Thus, the current fundamental and technical conditions are nearly opposite of when the market highs were made in 2014.”

Is there an opportunity for your farm?

While no market analyst can consistently and accurately predict the future, it is still important to engage them in developing your own backup plans, said Viney.

“It may also be a good time to search out some custom feeders that may be able to handle your livestock at a reasonable cost. The September 2015 issue of Canadian Cattlemen magazine contains a good listing of potential feeders. It sure wouldn’t cost much to make a few phone calls just in case you may want their services in the future.

“If nothing else, you’ll get to visit with some folks who are working a little further along the supply chain. You may get a feel for some potential strategic marketing opportunities since some feedlots may be able to offer partnerships or other interesting value propositions.”

Feeder associations can also be a good source of information and may also be able to offer some flexible financing programs to assist with cash flow, he added.

Early weaning may be another strategy to maintain your cow herd, he said.

“Placing lighter calves into a feedlot may be a feasible opportunity for some people if the appropriate financing and market arrangements can be negotiated. If timely rains come, life is good. But if they don’t, a little proactive strategic risk management may be in order. It’s always good to have a Plan B.”

Click here for a link to the Cattlemen feedlot guide.

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