27 Jun 22

Cattle Markets: Understanding (& Navigating!) Post-Covid Volatility

Contributed by Fidel Burciaga, Cattle Risk Advisor, Silveus Financial

Persistent volatility has been the name of the game for several months in commodities markets. However, the post-covid era has proved anything is possible.

A Look Back

The protein industry struggled to meet the demand of panic-driven consumers in 2020, but somehow, even with a depleted workforce, meatpackers successfully moved product through the supply chain. As demand for beef remained strong, due in part to the covid relief funds middle- income families received, the average consumer continued buying ground beef, middle meats, and high-end cuts.

In the mid to latter part of 2021, the cattle market finally seemed to recoup ground lost to the pandemic. Packer profit margins gradually saw a correction, prices were on the rise and there was rumor of supply shortage. The indicators were all there - the feeder and live cattle markets were headed in a bullish direction!

As ranchers and cattle producers awaited the “higher cattle prices” at the end of ‘21 and start of ’22, the late summer drought that started in the middle part of the U.S. progressively got worse. Drought not only affected the Great Plains, but also the Midwest, West and Southwest regions. The drought pushed feeders to feed yards sooner than expected, flooding the market with supply.

As the drought corrected itself and cattle prices started to make highs in late February, Russia invaded Ukraine, sending grain markets soaring. In typical market fashion, as grain prices went up, cattle prices went down. Rising gas prices and inflation all but erased any bullish sentiment in the short term (2-3 months) for feeder and live cattle markets.

Now Where Do We Stand?

This spring saw record cattle placement numbers at feed yards in states such as Texas, Kansas, & Nebraska. These states make up a good portion of the cattle feeding operations in the country.

Record placement numbers combined with slowing demand at the consumer level has kept feeder cattle prices at subpar levels. However, if packing plants can continue harvesting cattle at post-covid slaughter rates, the record number of cattle in feed yards will be back to normal around late summer/early fall.

Retail beef demand — both nationally and internationally — is beginning to back off for the first time in several years. Rising inflation, record-high gasoline and energy prices, as well as the

possibility of a recession, resonate both at home and abroad. Those — and other factors of uncertainty — have driven middle-class America opting for cheaper protein sources at the grocery store.

A Look Forward

Domestic beef production in 2022 will likely be the second highest in history, with 2021 being the highest ever! Average beef carcass weights in 2022 are setting a record. Why? Because feed lots are holding cattle in anticipation of higher prices while those cattle continue to gain.

With beef demand slowing, moving historically large domestic beef supplies sets up the potential for a bigger seasonal break in wholesale beef prices than most expected at the onset of 2022.

How the seasonal price break plays out will depend on how effectively packers manage margins and just how much wholesale prices decline.

Although we’ve seen a great deal in the last couple of years, better times are ahead. Market cycles like these are inevitable and every 10 years or so the cycle tends to repeat itself in a similar fashion. As a cattle producer, you are a price taker, ultimately the price you receive for your cattle is set by consumers down the supply chain. Beef prices — like weather, global instability, and disease outbreak — are out of your control.

As a producer, I ask myself what can I do to protect my herd and myself from volatility and market forces that are out of my control? You likely ask the same questions as you look at your operation, your business, and your legacy.

We at Silveus are cattle people ourselves. We understand the inherent risk and challenges of cattle production because we live it. That’s why we invented software programs like nCompass and GridFlex to help cattleman facilitate business-minded decisions to attain profitability and longevity.

If you’d like to see how Silveus can help you manage volatility and maximize returns from your hard work, give us a call or visit www.silveusfinancial.com.

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