Weekly Outlook:

Don't panic

[October 21, 2008]  URBANA -- Nervous cattle producers have received a bit of advice from a Purdue University Extension marketing specialist -- don't panic.

"Odds favor a recession and not a depression," said Chris Hurt in a report distributed by University of Illinois Extension. "Understanding the magnitude of the recession is becoming easier as the impacts of the past few weeks affect consumer spending, business investment decisions and trade.

"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.

"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.

"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]