Anyone who doesn't get the Daily Livestock Report form Chicago I would recommend it as a good freebie. I learn a lot from their commentary and the price if right. This was from yesterday's and I thought it was pretty interesting. (Hopefully the chart copies across).
Market Comments
One of the questions we hear often
from end users in the US beef industry is how
long prices will stay at current "exorbitant" levels
and if we see a decline in the coming
months. Our answer : Cattle prices are not
too expensive, they are too cheap. The US
livestock and poultry sector has undergone a
significant input price shock in the last three
years and we have yet to see the full effect of it.
Corn prices moved from an average price level
of about $2.5 per bushel during the period 1980
- 2005 to a much higher plateau; possibly one in
the $5- $6 range although the proper level will
take time to materialize. For better or worse,
the US livestock and poultry sectors during the
second half of the 20th century became increasingly
dependent on an abundant and inexpensive corn supply. Diets for cattle, hogs and poultry were constructed so that they
took full advantage of inexpensive corn. In the last decade, however, US livestock producers have had to deal with increased
competition for their feedstock from other sources, particularly ethanol. Note that 10 years ago, more than half of all the US
corn supply went into livestock feed. Today livestock feed accounts for 37% of the supply pie. More importantly, the rise of ethanol
demand meant that the old corn supply base was insufficient and that higher prices were needed to induce producers to
bring more acres into production and boost productivity by maximizing resource use. This is all good news for corn producers
but it implies a very different cost structure for livestock and poultry producers. The chart above shows the ratio of cattle to
corn, illustrating the deep and prolonged shock in input prices for cattle producers. Yes, cattle prices are well over $100/cwt but
in the context of $6 corn, that price still is on the low end of what producers need to get to bring their costs and margins in line.
Cattle feeders are now using more ethanol by-products and pastures provide a less expensive option to add pounds to cattle.
However, keep in mind that as corn prices move up, the price of just about every other feedstock, be this DDGs, hay, pasture
rent, etc, will also increase. At current levels, the ratio of cattle to corn is near some of the lowest levels of the past thirty years,
hence our comment that cattle prices are too cheap. If corn prices hold at around $6 per bushel (some are thinking even higher
money to ration demand and "buy" more acres this spring), then cattle prices need to fetch about $130/cwt to come back anywhere
close to the five year average ratio levels. Much higher cattle prices (or sharply lower corn prices) will be needed to return
to the longer run levels of the past two decades. In the short term, the input price shock has boosted beef supplies as cowcalf
operators have liquidated the beef cow herd and limited heifer retention. Indeed, if corn prices continue to climb we may
see further liquidation even at current live cattle and feeder cattle prices. However, in the long term the livestock industry will
need to adjust to the new level in feed prices, and for that to happen, cattle prices will have to be at significantly higher levels.
This is not good news for US retailers and foodservice operators, who may see some of their margins shrink as they try to pass
on the higher costs. And unless US consumers are willing to change their food consumption habits and standard of living, this
also implies that meat purchases will take a larger portion of the take home pay in the coming years.
Market Comments
One of the questions we hear often
from end users in the US beef industry is how
long prices will stay at current "exorbitant" levels
and if we see a decline in the coming
months. Our answer : Cattle prices are not
too expensive, they are too cheap. The US
livestock and poultry sector has undergone a
significant input price shock in the last three
years and we have yet to see the full effect of it.
Corn prices moved from an average price level
of about $2.5 per bushel during the period 1980
- 2005 to a much higher plateau; possibly one in
the $5- $6 range although the proper level will
take time to materialize. For better or worse,
the US livestock and poultry sectors during the
second half of the 20th century became increasingly
dependent on an abundant and inexpensive corn supply. Diets for cattle, hogs and poultry were constructed so that they
took full advantage of inexpensive corn. In the last decade, however, US livestock producers have had to deal with increased
competition for their feedstock from other sources, particularly ethanol. Note that 10 years ago, more than half of all the US
corn supply went into livestock feed. Today livestock feed accounts for 37% of the supply pie. More importantly, the rise of ethanol
demand meant that the old corn supply base was insufficient and that higher prices were needed to induce producers to
bring more acres into production and boost productivity by maximizing resource use. This is all good news for corn producers
but it implies a very different cost structure for livestock and poultry producers. The chart above shows the ratio of cattle to
corn, illustrating the deep and prolonged shock in input prices for cattle producers. Yes, cattle prices are well over $100/cwt but
in the context of $6 corn, that price still is on the low end of what producers need to get to bring their costs and margins in line.
Cattle feeders are now using more ethanol by-products and pastures provide a less expensive option to add pounds to cattle.
However, keep in mind that as corn prices move up, the price of just about every other feedstock, be this DDGs, hay, pasture
rent, etc, will also increase. At current levels, the ratio of cattle to corn is near some of the lowest levels of the past thirty years,
hence our comment that cattle prices are too cheap. If corn prices hold at around $6 per bushel (some are thinking even higher
money to ration demand and "buy" more acres this spring), then cattle prices need to fetch about $130/cwt to come back anywhere
close to the five year average ratio levels. Much higher cattle prices (or sharply lower corn prices) will be needed to return
to the longer run levels of the past two decades. In the short term, the input price shock has boosted beef supplies as cowcalf
operators have liquidated the beef cow herd and limited heifer retention. Indeed, if corn prices continue to climb we may
see further liquidation even at current live cattle and feeder cattle prices. However, in the long term the livestock industry will
need to adjust to the new level in feed prices, and for that to happen, cattle prices will have to be at significantly higher levels.
This is not good news for US retailers and foodservice operators, who may see some of their margins shrink as they try to pass
on the higher costs. And unless US consumers are willing to change their food consumption habits and standard of living, this
also implies that meat purchases will take a larger portion of the take home pay in the coming years.
