It Should Be an Exciting, Wild Ride
Prices are moving higher, but it’s not a straight line. Mitigate your risk for a roller-coaster ride.
June 2, 2024
Our friends at CattleFax make a compelling argument. Cattle prices for the next several years are on a pretty predictable course. Standing up and repeating the mantra, “Higher, higher, higher,” isn’t irrational exuberance; it’s a studied and justified prediction.
We have already seen fed cattle, feeders, calves, and cull cows and bulls hit all-time historical highs. Record prices in and of themselves make positive news, but all these records have occurred more out of anticipation of tightening supplies than tighter supplies themselves. The supply of cattle outside of feedyards is historically tight and is expected to remain so, but fed-cattle marketings are just beginning to tighten up.
The economists are right in their prediction that supplies will tighten, and that will continue to be supportive of pushing prices higher. We know that the leverage is shifting and will continue to shift in favor of cow-calf producers vs. feedyards and packers, who will be battling for those tighter supplies. In fact, the higher prices we have seen for cattle have happened as a result in a shift in leverage more than as a change in macro supply and demand relationships.
Plus, we know that beef demand continues to be a net positive. There is legitimate concern about how high we can push beef prices at the consumer level. At some point, as beef widens the price gap between itself and pork and poultry, consumers will become resistant to higher prices.
With that said, when you graph out supply and demand, you create an attractive chart for expected prices. The line is moving up, and the slope of that line is relatively steep.
Not a straight line
While the trend is our friend, the downside to all this good news is that we tend to assume market prices will move in a pretty straight line, as well. History tells us there will be some significant highs and lows around those trend lines.
An interesting caveat to the current state of the cattle market is that volatility and risk are increasing. At today’s price levels, it is important to note that the downside risk is going to be larger than the upside potential.
Illustration by Leann Schleicher using Adobe Firefly AI technology.
Historically high price levels coupled with historically high risk levels and historically high volatility means risk management and marketing are going to remain paramount concerns for cow-calf producers for the next several years.
This spring was a great illustration of this. We had just set new all-time highs in the fed market when concerns about bovine influenza A virus (BIAV) set the cattle market back, destroying the momentum we had been building going into what is typically our seasonal top for spring fed prices. The futures market experienced significant pressure, causing cash prices to soften despite all the solid market fundamentals.
Colder weather delayed the beginning of grilling season demand. The wars in Ukraine and Israel added more uncertainty. There are a lot of day-to-day and outside influences that will continue to drive the market higher and lower.
There is an old axiom that says, “sell the rumor and buy the fact.” Price volatility is almost as much of a certainty as higher prices as we look out the next several years. Market fundamentals always win out in the long run. But in the near term, fear and greed tend to be the drivers. Whether it be some sort of economic upheaval and consumer concern, a health outbreak, weather, or some political event, there will always be forces both internal and external that drive the market in the short term.
These types of huge market swings are frustrating, especially when the majority of the time the short-term drivers are largely inconsequential. Yet, the reality is, the one factor markets hate more than anything is uncertainty; and these types of outside factors create a lot of uncertainty. This is especially the case when prices are as high as they are. I mentioned it earlier, but it probably bears repeating: From these price levels, there is more downside than upside. So, mitigating risk is key.
The reality is, the one thing markets hate more than anything is uncertainty.
Risk averse
Even when we have a pretty clear idea of the direction of the markets and that price levels should remain strong, there is probably more risk and potential for volatility than at any time in our business. That is one of the reasons we are not seeing expansion occur despite improved profitability. With record input costs, high interest rates, drought concerns across wide swaths of cow country, and unprecedented risk and volatility, producers remain hesitant to expand.
Supply is ultimately shaped by economics and factors like weather. As individuals, we can do very little to alter the supply situation, but we can utilize the information to make more effective management and marketing decisions. Growing demand is how we grow our business. It’s how we grow margins. Hitting demand targets is how individual operations increase profitability.
As producers, it boils down to two key principles:
- Improve production efficiency.
- Increase the quality of the product we are producing.
In a nutshell, for the next several years we are looking at higher price levels and correspondingly high levels of price risk. These two facts, when coupled with the overall pricing signals that are sending clear signals about the value of quality and efficiencies of production, point to a clear two-step strategy for producers wanting to increase profits and margins over the next several years.
Step 1:
Recognize genetics are the No. 1 differentiator in the marketplace. Health, nutrition and management are important; but those have become largely assumed if one is to participate in the higher tiers of our market. The influence of genetics on profitability has never been higher. The genetic differences between the good, the average and the poor cattle have never been wider.
AngusVerifiedSM and the Genetic Merit ScorecardSM are designed to help you differentiate your cattle and give buyers confidence in what they are buying by giving them a reliable, objective way of knowing the genetic merit in a pen of feeder cattle.
Step 2:
Reduce risk. Reducing market risk has always been a challenge for cow-calf producers, especially with increased volatility. The cattle feeding and packing industries have the advantages of being able to use cattle futures, to reduce risk through more consistent involvement in the market, and to leverage the shorter time windows created by faster inventory turnover.
The cow-calf producer’s best tools for reducing risk come down to a strategy of differentiation through quality, increased market access, enhanced efficiencies and improved quality. I would argue that reducing risk largely boils down to increasing market access (more potential buyers = less risk) and increasing quality (increasing the demand for your product).
This is perhaps the biggest fundamental difference in this cattle cycle than previous ones. In this cattle cycle, marketing, risk management and product differentiation are growing in importance.
The future is bright, but it will not be shared equally.
Editor’s note: Troy Marshall is director of commercial industry relations for the American Angus Association.
Topics: Feeder-Calf Marketing Guide , Marketing
Publication: Angus Beef Bulletin
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