"Markets often anticipate the worst, and if the worst does not
occur, there is some recovery. That may well be the direction
for the cattle markets as well. If so, this would enable cattle
prices to recover several dollars per hundred, but feed prices
would be expected to rise as well."Hurt was reviewing the
cattle market, which, along with U.S. agriculture in general, is
caught in the web of uncertainty created by the financial crisis
of 2008.
"The cattle industry is no exception, as both domestic and
foreign demand for beef is related to consumer incomes," he
said. "Where the U.S. and world economies go is expected to plot
the direction for cattle prices. As a consequence, beef supply
fundamentals seem less important to prices, at least for now."
Hurt noted that concerns over the downturns in the U.S. and
world economies have been headline news recently from Wall
Street to Main Street to RFD America. The stock market, as
measured by the S&P 500 index, was down 23 percent from Sept. 26
to Oct. 17. The effect on the cattle market was significant as
well, with December live cattle futures falling 10 percent and
the price of finished cattle falling $8.50 per live
hundredweight.
"The recent financial losses for the cattle industry were
particularly large for feedlots that did not have finished
cattle forward-sold, especially those who had purchased
high-priced calves and high-priced feed this past summer," he
said.
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"The most likely group in this category is small-farmer
feedlots, as many large commercial feedlots have a greater
tendency to have cattle forward-sold. The negative financial
impacts on cow-calf producers have been somewhat less in recent
weeks, as November feeder cattle futures fell only 7 percent."
Looking forward, the current decline in feed prices has been
a huge advantage in reducing costs of finishing cattle and
helped to keep the declines in calf prices more moderate, he
added.
"Feed prices have fallen by a much larger percentage than
have cattle futures," he said. "During the last three weeks,
December corn futures fell by 25 percent, with December soybean
meal futures down 20 percent."
Beef demand and cattle prices are directly affected by
consumer incomes. The current financial crisis may reduce those
incomes and, therefore, cattle prices.
"The magnitude of the decline in incomes will influence the
magnitude of the decline in cattle prices," said Hurt. "The last
two recessions in the United States were very mild. This
recession may be more severe, more like the recessions of 1974
and 1975 and again in 1981 and 1982, when real gross domestic
product dropped near 3 percent.
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"A drop of that magnitude this time could have a $4.50 to $5 per
hundredweight negative impact on live cattle prices -- not as much
as prices have already dropped. This would suggest that the live
cattle futures decline of $10.25 per hundredweight over the past
three weeks is too much."
Hurt noted that this is probably true if real GDP drops only 3
percent or less in a coming downturn.
"However, as many supposed experts have stated to the media,
‘this is the worst financial crisis since the Great Depression,'"
Hurt said. "These statements suggest the possibility that the
downturn will be much greater."
At present, the leading indicator for the cattle sector is
probably the stock indexes. If there is a general improvement in
global financial concerns, it will be quickly reflected in stock
prices. Indicators today say that the credit crisis is easing
somewhat, and money flow between banks is beginning to improve some.
"The odds of a financial collapse are now somewhat lower, as the
governments of the world's major economies have pledged to make sure
the collapse will not occur," he said.
For the cattle producer, Hurt said buying feed at this time is a
consideration, with both harvest and a financial crisis weighing on
grain prices.
"But that has to be done with a view to the risk-bearing ability
of the individual firm," he said. "In these uncertain times, locking
in feed costs without pricing output leaves one in a vulnerable
position if the recession is worse than anticipated.
"Taking positive margins by establishing both input and output
prices is always the more comfortable strategy in uncertain times."
Hurt said that recovery in finished-cattle prices to the
low-to-mid-$90s would seem to be the most likely possibility in
coming months. A recovery of $5 to $7 per hundredweight might be
appropriate to expect for feeder cattle and calf prices as well.
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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