Kentucky Beef Cattle Market Update

 

I’m on the record being relatively optimistic about cattle markets in 2020. After some very tough years, decreasing cattle numbers and a positive outlook for exports gave me reason to expect better prices in 2020. The first couple of months even seemed to confirm my prediction. But, here we are and I see very little reason to talk about much other that the main topic at hand this month. Virtually every market that exits is currently trying to grasp the impact of the COVID-19 virus. In truth, there is little precedent for something like this in the marketplace, so making predictions is nearly impossible. Further, the situation is evolving as we speak and will undoubtedly change between the time I write this (3-16-20) and the time it is read. Obviously, I can’t address the medical side of the issue, but I thought it might be useful to talk through some things relative to the cattle markets.

 

I am including monthly price charts through the second week of March, but they don’t completely tell the story at hand as quickly as markets are moving. Heavy feeder cattle prices were extremely strong as we closed out 2019 and dropped considerably in January and February (see figure 1). This drop is seasonally normal, but it was a sharper drop that usual this year and COVID-19 may have been part of the reason for that. Still, through the end of February, the impact seemed relatively small. However, things changed quickly as average prices fell by $10 per cwt from the third week of February to the second week of March.

 

 

Unlike heavy feeder cattle, calf markets tend to move higher as we get closer to grazing and they seemed to be shrugging off most anything negative as it looked like things were setting up for an early spring. The calf market didn’t show any weakness at all until the second week of March (as I was writing this article). Even then, the impact was much less than was seen in heavy feeder cattle markets. Often, market shocks like this have greater impact on cattle that are closer to harvest, which would imply more impact on fed cattle than heavy feeders and more impact on heavy feeders than calves. I think the positive impact of what looked like an early spring grazing season offset most negative impacts on calf markets.

 

 

Source: USDA-AMS, Livestock Marketing Information Center, Author Calculations

 

I think it’s important to remember that feeder cattle markets are expectation markets. Feeder cattle and calves that are sold will be placed on feed, or placed into a growing system, and harvested several months later. It is really the expected impact on supply and demand for fed cattle and beef in the future that drives the value of feeder cattle and calves today. In the case of COVID-19, the short run supply impacts are likely pretty small as there is little reason to expect much immediate change in beef production or cattle numbers. However, there is potential for longer run supply impacts if depressed markets continue as producers tend to delay marketing, cattle spend more time on feed, weights increase at harvest, etc. This usually creates a backlog of cattle that eventually has to work through the system before things can return to normal and ends up prolonging the price depression.

 

While some supply impact is likely in the cattle markets the longer prices are impacted, COVID-19 largely represents a demand shock. And the impact of this shock really comes down to how significantly, and for how long, beef demand is impacted. The initial impacts on the market in January and February were probably related to exports as markets tried to anticipate the impact of slowing Asian economies that the US exported beef to. Exports are a significant driver of beef prices, so this was (and still is) a very real concern.

 

While exports are important, about 88% of US beef is consumed domestically. Since early March, the domestic impacts are starting to become the larger concern and the price impacts have been greater. In the short run, I don’t expect people to consume less beef. In fact, beef sales have likely increased as some people have stocked up on food. However, remember that is likely a trade-off, meaning purchases may be lower the next few weeks due to increased purchases this week. But I do expect that consumption will shift somewhat away from foodservice / restaurants and more towards at-home consumption. A lot of restaurants to going to push carryout and delivery, but I believe restaurant sales will decrease considerably. Away-from-home beef consumption is extremely important to the beef market and this will have an impact on beef prices very quickly.

 

In the longer run, the slowing of the economy is the largest concern. The cancellations of major events, conferences, athletic tournaments and seasons, and a great deal of domestic and international travel clearly has an economic impact and that impact will work its way through the system. These types of changes have the potential to lead to layoffs, reduction of hours, and other impacts on workers. And, the longer the issue persists and the greater the concern of recession becomes, the more likely consumers shift to less expensive meat products. Since beef is a relatively expensive meat, it becomes more vulnerable to substitution that its competitors. Put simply, the longer COVID-19 stresses the economy, the more severe the impact on beef prices is and the longer it will last.

 

This is yet another “black swan” event that is virtually impossible to predict yet has the potential for major market impacts. I feel like I say this a lot, but risk management strategies such as forward contracting, futures and options markets, and Livestock Risk Protection (LRP) insurance offer protection opportunities from these types of price shocks. However, there is nothing counter-cyclical about any of these strategies. You must protect your sale price before market fundamentals change. Unfortunately, this is another reminder of how quickly this can happen and how important protecting ourselves from things like this is.