Cattle Market Update

Dr. Elliot Dennis Author

08/27/2021 Added

18 Plays

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Dr. Dennis discussing current cattle market updates at the 2021 GSL Open House.

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[00:00:00.453](upbeat music)
[00:00:07.527]I'm really happy to talk about this
[00:00:09.670]because we're at kind of a pivotal stage
[00:00:12.150]where we're at in the cattle cycle,
[00:00:13.594]and there's a lot of things that have been happening
[00:00:15.850]in the cattle market, so this just really gets me pumped up.
[00:00:19.820]One thing I am going to focus on in particular
[00:00:22.800]is kind of where the markets are at currently
[00:00:25.500]and what it looks like going forward.
[00:00:27.140]So why don't we go ahead and get started and just recognize
[00:00:29.410]that over the past two years,
[00:00:32.440]the cattle market has really experienced
[00:00:34.470]a lot of movement, right?
[00:00:37.130]I just listed a couple of things
[00:00:38.490]that have been major drivers, Tyson fire,
[00:00:42.020]the packing plant that burned down in Holcomb, Kansas
[00:00:44.800]was eventually rebuilt in December.
[00:00:47.080]We can talk about COVID all day, right?
[00:00:49.080]And the issues that happen there,
[00:00:52.067]high COVID cases amongst packing plants,
[00:00:55.170]a lot of political pressure to fix those issues,
[00:00:59.270]leading to slower chain speeds, back up in cattle.
[00:01:03.150]We can talk about historical demand.
[00:01:05.950]Right now, retail beef, export demand for beef,
[00:01:09.810]all time highs.
[00:01:10.930]I'll show you a couple of those graphs.
[00:01:13.010]Really, we're talking about levels
[00:01:14.960]that we have not seen for demand really since the mid 1980s.
[00:01:19.080]So, put that into perspective.
[00:01:21.360]A new thing that we've experienced right now
[00:01:24.330]is the cyber attacks, JBS cyber attack,
[00:01:28.220]potential issues moving forward there.
[00:01:30.690]And then overarching this year has really been
[00:01:33.550]significant run-ups in grain prices
[00:01:36.010]due to a lot of export demand, in particular,
[00:01:40.270]a lot of low stocks to use ratio.
[00:01:43.030]Stocks to use basically means how much supply for a year.
[00:01:47.150]When that number is really low,
[00:01:48.550]it basically means we don't have enough supply
[00:01:51.670]to meet our current demands.
[00:01:53.760]And then on top of that,
[00:01:55.300]we have the drought that's really affecting
[00:01:56.960]a lot of the grazing pastures.
[00:01:58.430]So, when I look at all these market conditions,
[00:02:02.902]I kind of summarize these into a supply demand
[00:02:07.246]because, as economists,
[00:02:09.090]this is how we make sense of markets.
[00:02:11.011]So oftentimes, I'll get calls from reporters
[00:02:14.560]or I'll get called from producers and they'll say,
[00:02:16.640]where are markets going?
[00:02:17.670]I don't understand this.
[00:02:19.160]This is the framework.
[00:02:20.360]If you talk to almost every agricultural economist,
[00:02:24.630]they're gonna put it in terms of supply and demand.
[00:02:27.380]And the reason why is because
[00:02:28.660]when we talk about things that moves price,
[00:02:31.690]it's either moving a supply curve or a demand curve.
[00:02:35.820]This, these are all summaries of what I think
[00:02:38.940]are primarily driving the market.
[00:02:41.440]I have several slides that support these.
[00:02:43.810]We can talk about any of these in particular
[00:02:46.714]at the end of the presentation, but as I said,
[00:02:50.820]mid 1980s historical demand.
[00:02:53.760]So what this basically does when we have strong demand
[00:02:57.550]is it's pushing this curve out.
[00:03:00.550]What that does is it essentially incentivizes us
[00:03:03.740]to produce more and raises price.
[00:03:06.880]That's a positive thing, right?
[00:03:08.900]We want, you know, generally we want prices to increase.
[00:03:12.580]Well, the reason why we can actually increase our quantity
[00:03:16.710]we need to produce is because people are buying the product.
[00:03:20.200]If people don't buy the product,
[00:03:22.150]that demand doesn't get passed down from the consumer
[00:03:25.490]to the packer, to then, to the feed lot,
[00:03:28.360]to then to the cow, calf producer.
[00:03:30.310]So it's always looking at what is driving consumer demand
[00:03:34.172]and export demand.
[00:03:36.260]If it's not strong, then there's no real strong
[00:03:38.940]incentive to produce.
[00:03:41.740]Particular, what we've experienced this year
[00:03:43.440]has been astronomically high increases in Chinese exports.
[00:03:48.910]To put that into perspective,
[00:03:52.540]this is Chinese exports.
[00:03:56.280]2015 to 2019, they purchased,
[00:03:59.500]basically purchased nothing from the US.
[00:04:02.760]Then we had that big squabble, if you remember,
[00:04:04.670]with the Chinese government and President Trump then,
[00:04:07.701]and they basically settled on an agreement,
[00:04:10.050]phase one, phase two agreement, right?
[00:04:12.570]What did that end up doing?
[00:04:13.740]They basically committed to purchasing beef.
[00:04:16.806]2020 was their first year
[00:04:18.590]that they had to purchase that beef.
[00:04:20.580]And they, there was some concern about COVID,
[00:04:23.310]whether they were going to meet that.
[00:04:25.180]Wow, they really met that.
[00:04:27.010]And right now they're at basically 45 million pounds of beef
[00:04:31.610]going to mainland China.
[00:04:34.020]So what that means is some, a boat left the US
[00:04:39.150]and docked in mainland China and was offloaded.
[00:04:42.420]This doesn't include what we call gray markets,
[00:04:44.850]which means it was shipped to Hong Kong
[00:04:46.460]and then got on a truck and then went into China
[00:04:49.510]or went to Vietnam,
[00:04:50.870]got onto a truck and was smuggled in.
[00:04:52.980]So, this is really important for us.
[00:04:55.700]To put that in perspective,
[00:04:57.550]if we are to look at where they were
[00:04:59.530]as our importance of competitor,
[00:05:01.970]they would be our number three exporting destination
[00:05:06.590]in the US, huge exports that are happening.
[00:05:10.180]That is a fundamental shift.
[00:05:12.540]Now, the question is, is that going to be sustained?
[00:05:16.160]Is this going to go back down to zero,
[00:05:17.830]or is this going to be something that we see long-term?
[00:05:25.010]On the supply side, we have a lot of pressure for,
[00:05:29.100]remember the cattle cycle, right?
[00:05:31.420]When prices are high, like in, you know, 2012,
[00:05:34.380]there's a lot of incentives to retain cattle.
[00:05:37.600]So what do people do, 'cause they're chasing those premiums.
[00:05:40.530]So we retain the cattle.
[00:05:42.480]Cattle feeder, cattle inventory increases.
[00:05:45.680]Well, what happens when we have
[00:05:47.010]feeder cattle inventory increasing?
[00:05:49.420]That means this supply curve is shifting this way.
[00:05:53.000]Well, prices go down, right?
[00:05:55.970]And so we keep shifting this curve.
[00:05:58.530]Supply keeps increasing. Producers keep retaining.
[00:06:01.564]Eventually, prices are not great
[00:06:04.120]because feeder cattle inventory is really high.
[00:06:07.125]So, what happens?
[00:06:08.510]We start seeing herd liquidation, right?
[00:06:11.010]So, as economists, what we start to look at is,
[00:06:13.695]where is beef cow slaughter happening?
[00:06:16.430]Are there a lot of producers liquidating
[00:06:19.070]basically beef cows that will produce feeder cattle
[00:06:21.210]in the future?
[00:06:22.043]So we watch that creep up,
[00:06:24.020]and then we can watch what happens to the calf crop
[00:06:26.935]the next year.
[00:06:28.140]And so, what we actually found is that
[00:06:29.924]we're actually in contraction,
[00:06:32.020]and the drought is only going to accelerate that,
[00:06:34.630]which means feeder cattle inventory is coming down.
[00:06:38.620]Prices are going to slowly be increasing.
[00:06:43.660]And lastly, on the supply side,
[00:06:45.800]we have an unprecedented amount of cattle on feed.
[00:06:50.510]If we, if I were to show you cattle on feed right here,
[00:06:54.840]this is where we were at on 2020.
[00:06:59.120]This is about 12 million head.
[00:07:01.470]This is about 11 million head.
[00:07:03.210]Sorry, it got a little cut off here.
[00:07:05.500]But we were about a million head over
[00:07:09.290]where we should have been on our five-year average
[00:07:12.140]going into 2020.
[00:07:15.340]Okay, so, now paint that situation.
[00:07:18.550]Lot of cattle on feed,
[00:07:20.810]normally the April, May is a huge time
[00:07:24.100]when we can sell cattle.
[00:07:26.240]And then you have COVID that happens when?
[00:07:29.650]Right when we have all this fat ready cattle
[00:07:32.030]to come to market, can't harvest them.
[00:07:35.340]The good thing is this,
[00:07:36.720]we're slowly decreasing the cattle on feed.
[00:07:39.690]And some estimates are that we're probably going to be down
[00:07:42.840]next year about a half a million head on feed.
[00:07:48.870]The last thing is that we're dealing with
[00:07:53.220]that really all of those things are
[00:07:56.010]positive price supports that I told you about.
[00:07:58.610]It means demand is increasing,
[00:08:01.040]which means price should be pulling, being pulled up.
[00:08:04.697]And we have reduced supplies.
[00:08:07.000]That should also pull price up.
[00:08:09.870]Now, the thing that I really want to focus on is
[00:08:12.620]this feed situation,
[00:08:13.950]because this is probably the biggest thing that has the,
[00:08:18.010]or has the potential to really depress price this fall
[00:08:21.890]and potentially into next year.
[00:08:25.010]Particularly when we're talking about hay stocks.
[00:08:30.917]This is a spatial map.
[00:08:34.010]We can look at where hay stocks were relative,
[00:08:37.354]or in May 2020 relative to 2021.
[00:08:42.860]And this gives us an idea of how much hay
[00:08:44.710]we actually have to use.
[00:08:47.740]If you remember the drought,
[00:08:51.660]the drought was happening big time right here, right?
[00:08:55.350]And so what does that really incentivize people to do?
[00:08:59.600]You know, we have producers who, you know,
[00:09:01.650]we want to feed cows.
[00:09:03.500]So we got to feed them.
[00:09:04.740]If we don't have forage,
[00:09:07.020]we have to buy the hay and import it.
[00:09:11.900]The darker the color is, this, the more,
[00:09:15.920]or the larger decrease in the hay stocks.
[00:09:19.710]California is basically down 50% of their hay stocks
[00:09:22.892]relative to where they were in 2020.
[00:09:26.010]New Mexico is down 55%.
[00:09:28.750]And even though, here in Nebraska,
[00:09:30.340]we haven't had large amounts of drought,
[00:09:32.163]there's been pockets of area where there have been droughts
[00:09:36.110]and reduced forage both in quantity
[00:09:38.330]and the quality of the forage,
[00:09:40.450]we're still down about 30% of the hay stocks.
[00:09:44.970]What, basically what that would tell us is that
[00:09:47.710]as the drought has basically been
[00:09:49.920]confined to that western region,
[00:09:51.320]there's a lot of desire to pull stocks from these edge areas
[00:09:56.630]or these bordering states into, let's say,
[00:09:59.330]Colorado or New Mexico.
[00:10:01.790]And so, here we are, we're trying to think about, you know,
[00:10:05.010]what the drought could look like.
[00:10:06.690]Pretty much we're on our,
[00:10:12.569]where is it?
[00:10:15.930]We're pretty much on our second year of the drought.
[00:10:19.060]This is a crop prog or pasture and range land condition.
[00:10:26.160]So, pretty much since last year, this is 2020,
[00:10:29.050]we've experienced some sort of drought like conditions.
[00:10:33.140]This is 2021, and right here, this is about 65%.
[00:10:39.850]So, when USDA goes out and surveys,
[00:10:42.250]about 65% of all the pastures in the Great Plains Region
[00:10:46.510]were rated as poor or very poor.
[00:10:49.610]So really this is, when we,
[00:10:51.860]I talked, when we talk to other people,
[00:10:54.300]it's about pretty much the second year
[00:10:56.470]we're entering the drought.
[00:10:59.170]The reason why I point that out is because
[00:11:00.810]some work out of the University of Wyoming
[00:11:03.130]has suggested that where we're at
[00:11:05.050]in the cattle cycle with really high inventories,
[00:11:08.910]we have pretty much two decisions we can make.
[00:11:12.040]We can liquidate cows, or we can buy more hay.
[00:11:16.860]And where we are at in the cattle cycle
[00:11:18.880]actually really matters
[00:11:20.130]on what we call the profit maximizing decision.
[00:11:24.230]And so, given that we have high levels of inventory,
[00:11:27.870]pretty much, we have to decide
[00:11:29.260]how long the drought is going to be.
[00:11:31.860]If we believe the drought is going to be
[00:11:33.660]at least one more year,
[00:11:35.910]then the optimal decision would be
[00:11:38.630]to liquidate some of your cows.
[00:11:41.430]If we believe that this year is going to be the last year
[00:11:45.470]and basically next year,
[00:11:47.070]we'll return to normal forage production,
[00:11:50.300]then we buy hay at increased prices.
[00:11:55.090]That's all for you guys to decide on
[00:11:57.100]what you think and talking with other meteorologists
[00:11:59.910]or your local area, and recognizing that
[00:12:02.430]that's the decision relative to where we're at hay stocks.
[00:12:05.480]Hay stocks are depleting,
[00:12:07.190]which means that price is going to go up.
[00:12:08.943]It's going to be relatively more expensive to buy that hay.
[00:12:13.320]Given where we're at in the cattle cycle
[00:12:14.910]with elevated inventories,
[00:12:16.890]we have to decide how many years
[00:12:19.480]this drought is going to last.
[00:12:21.470]So that's probably the biggest takeaway
[00:12:23.510]when we're talking about going into the fall.
[00:12:26.060]Maybe as you're starting to preg check
[00:12:28.010]and we're starting to say, okay,
[00:12:29.060]what should we do with some of these cows?
[00:12:32.060]If we believe it's at least one more year,
[00:12:34.590]then, optimal decision is to sell cows.
[00:12:37.570]If we believe that this is the last year
[00:12:39.210]the drought's going to be there,
[00:12:40.344]then the decision would be to buy forage
[00:12:43.400]at increased prices.
[00:12:47.870]So, the other thing that has a strong potential
[00:12:51.010]to depress feeder cattle prices going to the fall
[00:12:55.140]is the corn situation.
[00:12:58.040]And I emphasize this because as corn gets more expensive,
[00:13:02.550]it really decreases feedlots' demand for cattle
[00:13:06.540]because it's more expensive for them to feed.
[00:13:09.950]And what they tend to prefer
[00:13:12.100]when corn prices are really high is heavier cattle.
[00:13:15.543]It's because they don't have to feed as much corn,
[00:13:18.320]and so we have a strong potential
[00:13:22.650]if this corn price continues to stay elevated,
[00:13:26.950]or in some situations, some market economists have said
[00:13:32.160]that corn prices could be even higher than this,
[00:13:34.750]which is hard to imagine.
[00:13:37.090]But given where Brazilian crop is going to be coming out of,
[00:13:40.357]and the European crop,
[00:13:42.260]this price has the potential to go higher,
[00:13:45.030]which means it's just a further down pressure on price.
[00:13:48.690]I point these out because most of this risk
[00:13:51.180]that we're talking about in the feeder cattle market
[00:13:53.040]is mainly isolated to this fall.
[00:13:56.520]And beyond that, it looks like very positive price support
[00:14:00.370]moving forward into 2021 and 2022.
[00:14:04.802]So, just cutting to the chase here,
[00:14:07.550]what is actually this price forecast that's being projected?
[00:14:13.140]Now, some of you might remember Jim Robb.
[00:14:15.170]He's one of the economists
[00:14:17.580]from the Livestock Marketing Information Center,
[00:14:19.490]which I'm a part of.
[00:14:20.500]We basically get together monthly, sometimes quarterly,
[00:14:24.150]and we talk about what's happening in each person's region,
[00:14:28.630]forage conditions, cattle production,
[00:14:31.460]and we basically try to come up with the,
[00:14:33.780]what we consider our representative cattle forecast.
[00:14:37.700]This is, the numbers in black are what they predicted,
[00:14:44.420]and the red numbers are forecasted numbers.
[00:14:47.860]ERS also does this same level prediction.
[00:14:51.670]And it's important to note on these numbers,
[00:14:53.640]it is a 700 to 800 pounds
[00:14:55.970]Southern Plains feeder steer price.
[00:14:59.120]So, have to pick one region and kind of estimate off that,
[00:15:03.400]but really, going into this fall,
[00:15:05.270]they're looking at really in the 153, 154 range
[00:15:08.770]for the third quarter
[00:15:10.580]and a little bit lower in the fourth quarter, about 150.
[00:15:16.100]So, because that's the Southern Plains Region,
[00:15:18.240]what I wanted to do is focus on video markets.
[00:15:24.070]We get some strong signals that kind of go into the fall.
[00:15:27.920]And so, essentially what I did is I took
[00:15:29.859]all of the video sale transactions
[00:15:32.450]that happen from January
[00:15:33.796]all the way through end of last week.
[00:15:37.710]I compiled those all together,
[00:15:39.640]looked for sales that occurred in the North Central Region
[00:15:43.750]and compiled them all together.
[00:15:45.220]So that's kind of the data that I'm going to show you here.
[00:15:49.340]So, the way that you can break this down
[00:15:51.010]is this is steers by the weight that they were sold,
[00:15:54.260]heifers by the weight they were sold.
[00:15:56.550]And this is the month that they were scheduled
[00:15:59.140]for delivery, all right?
[00:16:02.290]So what we can see here is, you know,
[00:16:04.600]there's somewhat similar situations
[00:16:07.870]across the different weeks or different months
[00:16:12.430]for lower weights, but sizable difference here on this,
[00:16:16.871]on basically the weaned weight.
[00:16:19.890]So, you can use this as a source for information.
[00:16:22.610]I'm more than happy to send this out.
[00:16:24.870]And these are for all cattle
[00:16:27.390]that had no specification on them.
[00:16:30.530]So there was no premium or no discount associated with them.
[00:16:34.280]We'll go over some of the discounts and premiums
[00:16:36.480]on those types of cattle,
[00:16:37.550]but this is purely cattle that were sold
[00:16:40.380]with no premium or discount attached to it.
[00:16:43.630]So right here, if we're looking at it,
[00:16:46.580]yearling cattle, 170, you know,
[00:16:50.650]weaned cattle, somewhere in the 178 to probably 190 range.
[00:16:56.870]What we can do then is then we can take
[00:16:59.330]all of these transactions.
[00:17:01.350]So this is,
[00:17:02.183]each one of these points represents a transaction.
[00:17:05.490]This is price on dollars per hundred weight.
[00:17:08.940]This is weight.
[00:17:10.530]This is 400 pounds, and it's in 50 pound increments,
[00:17:13.880]450, 550, all the way to 900.
[00:17:17.700]And we can just plot these.
[00:17:20.060]The red lines represent steers.
[00:17:22.540]The green lines represent heifers,
[00:17:25.290]and the size of the dot represents
[00:17:27.500]the magnitude of that transaction.
[00:17:31.150]So the larger the dot represents more cattle were traded
[00:17:34.460]at that particular price range for a particular weight.
[00:17:38.490]The reason why we look at that is because
[00:17:41.040]it really gives us a market signal.
[00:17:43.761]More cattle transacted at a certain price level
[00:17:47.320]gives us a stronger price signal.
[00:17:49.160]If, and so, what we can do is then,
[00:17:51.620]we can calculate this price-weight slide.
[00:17:55.140]This, who's heard of a price-weight slide here?
[00:17:59.970]This is the price-weight side in action.
[00:18:02.420]So you aggregate all of those transactions
[00:18:04.590]that I just told you about
[00:18:06.050]between September, October, November,
[00:18:08.660]and you plot these.
[00:18:10.360]This is the price-weight slide here.
[00:18:13.370]So, what we see is that
[00:18:15.151]you can concentrate on this bump right here.
[00:18:18.830]This is where the premiums are being paid,
[00:18:22.470]and if I were to show you more detail, what is end up,
[00:18:25.700]what is happening this fall is that
[00:18:28.100]500 to 550 pound cattle are being discounted.
[00:18:33.150]And that premium discount is almost all being passed
[00:18:37.140]to cattle that are between 700 and 750 pounds.
[00:18:41.520]So, given that corn situation that I was telling you about,
[00:18:44.570]that's basically what feedlots are doing.
[00:18:47.660]People are buying these cattle,
[00:18:49.900]are basically discounting weaned cattle
[00:18:53.071]and having a preference for heavier cattle here.
[00:18:57.260]And what I'll show you with the futures market
[00:19:02.170]is that that premium is actually even greater,
[00:19:06.610]that there's huge incentives to retain, potentially,
[00:19:10.390]this fall, weaned cattle.
[00:19:15.020]So you can, a lot of, there's a large push
[00:19:18.250]to have value added programs,
[00:19:21.460]preconditioned programs, VAC45s,
[00:19:24.102]breed association programs.
[00:19:26.569]All of these are basically trying to connect them
[00:19:30.750]to the consumer and show
[00:19:33.770]that there's this genetic value or other potentials there.
[00:19:38.790]These premiums vary over time, and they're not consistent
[00:19:42.740]year to year or month to month.
[00:19:44.840]So, I point that out because
[00:19:46.750]sometimes we can hear what those premiums are going to be,
[00:19:51.350]plan accordingly, and then we don't realize that premium.
[00:19:55.600]So, the word of caution there is
[00:19:58.380]recognize that premiums are going to average
[00:20:00.490]over a long period of time
[00:20:02.170]and not be specific to a given year.
[00:20:05.160]So these premiums that I show you are specific for this fall
[00:20:08.720]for cattle that were specifically marked as value added.
[00:20:14.210]So, same set up here,
[00:20:15.510]steers by their weights, heifers by their weights.
[00:20:20.130]This is the cattle that were sold at these weights
[00:20:24.480]that no premium or discount was associated with them.
[00:20:28.810]This is for cattle where there is some sort of discount
[00:20:32.030]associated with them.
[00:20:33.540]This is cattle for that there was
[00:20:35.710]some sort of value added program associated with them.
[00:20:39.490]And this is essentially the value of the premium
[00:20:41.860]or dollars per hundred weight.
[00:20:44.420]So, if we go to here, 500, 5, 6 weights,
[00:20:48.510]about $4.73 or dollars per hundred weight
[00:20:53.380]premium for cattle that were value added.
[00:20:57.160]Normally what we'd see is that the value added premium
[00:21:01.710]for most programs should be higher
[00:21:04.180]for lighter cattle and lower for heavier cattle.
[00:21:08.540]The same idea, the price-weight slide,
[00:21:11.370]but there are programs that offer premiums inversely.
[00:21:16.890]So, lighter cattle actually receive lower programs,
[00:21:20.110]or premiums and heavier cattle achieve higher premiums.
[00:21:25.330]An example of that would be like all natural cattle, right?
[00:21:29.290]We know in all natural cattle can have anti-microbials.
[00:21:35.610]So, if a feed lot is bringing a 550 pound cattle
[00:21:39.770]or steer in, there's a much greater chance
[00:21:43.080]that that cattle is going to
[00:21:43.970]fall out of the program with BRD.
[00:21:46.250]And so they don't want to put
[00:21:47.610]a whole bunch of premium into that.
[00:21:50.080]800 pound cattle, very low risk
[00:21:52.480]when they come into the feed lot.
[00:21:54.070]And so they're going to compensate producers by saying,
[00:21:57.050]if it's gone, if it's been raised to 800 pounds
[00:22:01.390]and it hasn't had BRD, very low chance
[00:22:04.020]that once it gets in the feed lot, it's going to have BRD,
[00:22:07.660]or bovine respiratory disease.
[00:22:09.770]So, premiums do vary.
[00:22:12.710]Also, you can look at this to see
[00:22:14.190]kind of what that video market is suggesting.
[00:22:19.370]One way, so, video walk-ins do provide
[00:22:22.370]some sort of indication on what prices are going to be like
[00:22:27.760]in the future.
[00:22:28.610]The futures market essentially operates the same way.
[00:22:32.610]Futures contracts are when you sell a contract,
[00:22:35.860]you're essentially entering an agreement
[00:22:37.610]with another person to deliver.
[00:22:40.010]CME acts as the clearing house for that,
[00:22:42.610]which basically guarantees that you receive your money.
[00:22:45.660]He receives his cattle,
[00:22:48.830]and they standardize the contract for feeder cattle.
[00:22:51.640]It's 50,000 pounds.
[00:22:53.670]For a 700 pound steer, that's about 66 head.
[00:22:59.470]So we can look at what the video auction is saying
[00:23:02.770]prices should be for 700 and 900 pound steers and heifers,
[00:23:07.015]and we can compare it to
[00:23:08.665]what the video is to the CME futures.
[00:23:12.450]So essentially, all I do for CME futures
[00:23:15.340]for this price forecast is take what the futures market is
[00:23:19.210]for that delivery month and add a historical basis.
[00:23:23.770]Historical basis for Nebraska is generally positive
[00:23:26.860]for 800, 900 pound steers and negative for heifers.
[00:23:32.610]What this suggests is that the futures market
[00:23:35.920]is actually suggesting that there's a much greater incentive
[00:23:39.770]to retain cattle this fall than the video auction win.
[00:23:45.490]If you're into risk management,
[00:23:47.000]and you're seeing the differences
[00:23:49.180]between what the video's potentially offering
[00:23:51.620]and the futures,
[00:23:53.540]potentially looking into some risk management strategies,
[00:23:56.230]locking in a floor price, using a put,
[00:24:00.170]it's a little, it's too late to use
[00:24:02.120]livestock risk protection.
[00:24:03.840]But given where the futures market is,
[00:24:06.690]potentially locking in profits above break evens is,
[00:24:11.222]seems to be there.
[00:24:13.970]But I'll show you that is,
[00:24:15.630]the way that we can look at it as economists to say,
[00:24:18.870]where is the incentive to retain is
[00:24:21.490]we can look at what the carry is in the market.
[00:24:25.263]What this shows is that the cash,
[00:24:27.836]feeder cattle cash index is at 155.
[00:24:31.710]This is like a 13 state cash price average.
[00:24:36.860]And then we can compare that to
[00:24:38.300]what the feed, or the CME futures is doing.
[00:24:42.570]What we see is that there's,
[00:24:44.470]prices are basically increasing through time.
[00:24:47.960]What that's, what that market signal is basically saying,
[00:24:52.630]don't sell your cattle now.
[00:24:55.450]Retain cattle.
[00:24:58.420]So, that's the primary market signal
[00:25:01.950]that's being sent there.
[00:25:05.400]So, you can go and calculate
[00:25:06.923]what's called the value of gain.
[00:25:08.980]So just because that market signal is there,
[00:25:12.540]let's say in September, or let's say October 15th,
[00:25:16.650]you're saying, you know, I've got 550 pound steers.
[00:25:20.460]I'm thinking of whether I should sell these at weaning.
[00:25:23.380]You can decide whether you're going to retain them,
[00:25:27.100]which essentially means you buy it back to yourself
[00:25:30.716]because you could have sold them.
[00:25:33.380]You're essentially buying them for that price.
[00:25:36.090]The value of gain tells you from 550 pounds
[00:25:40.340]to the finished weight,
[00:25:42.440]you get paid for every pound you put on, right?
[00:25:46.740]And so, we calculate the value of gain
[00:25:49.250]because we need to compare it to our cost of gain.
[00:25:52.260]The value gain basically says,
[00:25:53.810]what is the market willing to pay you per pound
[00:25:55.820]to put on weight?
[00:25:57.640]Let's say it's a $1.80 per pound to put on weight.
[00:26:00.780]That's what the market's willing to pay you
[00:26:02.200]to put on a pound.
[00:26:05.370]If your cost of gain is less than $1.80,
[00:26:07.981]then you, there's a strong incentive, as a producer,
[00:26:12.130]then, to put on that weight.
[00:26:15.680]This is essentially what the value of gain looks like
[00:26:18.770]for a preconditioning program
[00:26:22.210]or selling it in January, right?
[00:26:24.490]So, I assume you're, October 14th here,
[00:26:28.990]you have this decision, 550 pound steer.
[00:26:33.730]You're going to go to Ogallala,
[00:26:35.202]and you're going to sell this at 750 pounds.
[00:26:39.390]This gives you the date range, kind of cut off.
[00:26:42.490]This is 1/10/2022.
[00:26:46.580]This is, I think that's January.
[00:26:53.790]This gives you kind of your idea
[00:26:55.230]if you run this type of program, this is the type of wake,
[00:26:58.150]or average daily gain, you could, you would be experiencing.
[00:27:01.720]So, obviously, if you're pushing cattle earlier,
[00:27:04.660]your average daily gain has to go up.
[00:27:07.220]If you slow cattle down a little bit more,
[00:27:09.810]then that average daily gain
[00:27:12.110]has to be a little bit lower, right,
[00:27:14.270]depending upon this end marketing date.
[00:27:17.290]What I want you to focus on here is this sell price,
[00:27:21.560]and notice that that sell price
[00:27:24.230]is still increasing through time.
[00:27:26.820]Which basically means that the market,
[00:27:29.660]given on this value of gain,
[00:27:31.680]is basically telling you to continue to hold cattle
[00:27:34.110]and put on weight.
[00:27:35.970]What this would mean is for, you know,
[00:27:38.075]that they're strong, they're, basically,
[00:27:40.360]they're strong signals to continue
[00:27:42.370]to retain cattle this fall.
[00:27:45.050]We can do the same thing for March cattle
[00:27:47.210]and have the different average daily gain.
[00:27:52.400]So, in overall, I think, this fall,
[00:27:55.140]our biggest concerns are going to be the feed situation
[00:27:58.480]going into 2021, 22 strong,
[00:28:01.590]both demand and supply signals
[00:28:03.490]that would support higher prices.
[00:28:05.785]Obviously, I showed you some stuff
[00:28:07.930]with the current market situation
[00:28:10.450]where it looks like the video has different premiums
[00:28:14.520]relative to CME,
[00:28:16.290]and some pretty strong signals to retain.
[00:28:20.380]Obviously, this is conditional
[00:28:22.320]upon market information today.
[00:28:24.720]And so, as we get to October,
[00:28:26.750]we need to continue to evaluate what that value gain is
[00:28:30.210]and what the current market signals are at that point.
[00:28:32.560]But, as of today, that's what I see.
[00:28:35.030]And I'd be more than happy to field questions
[00:28:37.670]or concerns you guys have.
[00:28:43.980]Do we have any questions for Dr. Dennis?
[00:28:47.560]And I can come around with the mic here.
[00:28:49.510]Oh, got one right here.
[00:28:54.330]If you look a little further ahead into next fall,
[00:28:58.750]when these cattle are getting ready to harvest,
[00:29:02.373]would you expect there to be additional premium?
[00:29:06.839]So, clarify what type of cattle,
[00:29:10.040]fat cattle or feeder cattle?
[00:29:11.540]Well, what I think is your 750 pounds steer
[00:29:15.251]in March in Ogallala is gonna finish in the summer.
[00:29:20.950]He's not going to finish at a very optimum time, is he?
[00:29:26.066]That's a good question there.
[00:29:28.780]Let me point out, where is it?
[00:29:36.040]I see, maybe this is where it is.
[00:29:40.030]Okay, so, this is basis, right?
[00:29:41.680]So, this is essentially the difference
[00:29:43.633]between the futures market and the cash price.
[00:29:46.730]That feeder cattle, 700 pounds.
[00:29:50.900]I still think the premium is going to be there
[00:29:53.470]for feeder cattle next year for 700 and 800 pound steers.
[00:30:00.490]Is that your question?
[00:30:02.110]Premiums for 700, 800 pounds next fall?
[00:30:05.960]He's asking,
[00:30:06.990]if you retain those cattle until they're fat.
[00:30:09.750]Oh, sure.
[00:30:10.785]I think the question was, what's the premium.
[00:30:13.179]Sure, yeah, so, the question is, yes.
[00:30:15.450]So, maybe that's where I was going here is that -
[00:30:18.007]Oh, actually, my thought here was,
[00:30:20.110]do I slow him down so that I'm hitting
[00:30:23.550]the October through February fat cattle market?
[00:30:29.700]So, I don't think
[00:30:40.090]that I have enough information to talk about that.
[00:30:44.420]I'm trying to tie it back to where I think cattle on feed
[00:30:47.290]is going to be next year,
[00:30:48.920]because that's going to be the biggest driver
[00:30:51.880]on whether you're going to retain
[00:30:55.040]or that market's going to be stronger or not.
[00:30:57.710]You're not the only one without that information.
[00:31:00.300]Yeah, so, but, what I'm trying to figure out is
[00:31:04.730]because the contraction is happening,
[00:31:07.970]and given lower drought or increased drought conditions,
[00:31:11.881]there's going to be a lot of lighter cattle
[00:31:14.090]that are going to be coming into the feed yards.
[00:31:16.780]And so, that's what I'm trying to put together,
[00:31:19.870]that potentially, if there is a whole,
[00:31:23.500]a huge push for lighter cattle to be placed
[00:31:26.288]because of increased drought conditions,
[00:31:28.990]that there would actually be a strong premium
[00:31:32.280]for heavier cattle going into that fall.
[00:31:37.000]That's kind of where I'm trying to tie
[00:31:39.216]what's happening with the drought situation,
[00:31:42.290]with what cattle on feed is,
[00:31:44.230]and given contractions in the feeder cattle market.
[00:31:48.200]So that's what, that's my kind of thought process
[00:31:50.680]and the signals that I would be looking for.
[00:31:52.740]Do you have a prediction on corn?
[00:31:55.377]No, I don't think anyone does.
[00:31:59.880]Like I said, there is a lot of variation on what the market,
[00:32:04.390]people who focus on corn in particular,
[00:32:07.250]and a lot of that has to do with
[00:32:10.350]what the Brazilian crop is going to do,
[00:32:12.180]whether they plant the double crop,
[00:32:13.708]and what European drought conditions look like.
[00:32:19.090]For people who actually believe
[00:32:20.820]that Brazil won't experience a double crop,
[00:32:24.193]which there's strong indications that they probably won't
[00:32:27.590]be able to get that,
[00:32:28.940]we're looking at an even tighter corn, or,
[00:32:31.910]stocks to use ratio,
[00:32:33.060]which would increase that price quite substantially.
[00:32:36.220]So, domestically, I don't there's, you know,
[00:32:40.930]there's a lot more certainty
[00:32:42.670]on where that corn price is going to do,
[00:32:44.160]but because we rely upon that Brazilian crop
[00:32:49.638]quite a bit, going into next year,
[00:32:53.890]there's just a lot of uncertainty on that, but, that's,
[00:32:59.810]that corn price is very high.
[00:33:02.240]And we're talking about 2007, 2008 type corn prices,
[00:33:07.560]when the ethanol blend mandate kind of came into play, so.
[00:33:14.610]Got a question back here.
[00:33:16.630]Those of you in the back,
[00:33:17.930]feel free to come on up to the front.
[00:33:20.120]There's plenty of seats.
[00:33:21.740]Don't be afraid. We won't bite up front.
[00:33:24.810]Thank you.
[00:33:25.820]I was curious, you had said that the overall inventory
[00:33:30.210]was very high right now.
[00:33:31.980]It was my understanding that there's been
[00:33:33.370]a lot of cattle sold due to drought.
[00:33:35.720]Did a lot of those get re-homed or did they go to slaughter?
[00:33:40.340]And what do you think cow herd numbers
[00:33:42.430]are going to do on the inventory side,
[00:33:44.950]which leads into the supply side of your presentation?
[00:33:50.900]Sure. Yeah, a great point.
[00:33:53.233]This is beef cow slaughter.
[00:33:55.220]Once again, this got cut off here,
[00:33:56.920]but when we're talking about herd inventories,
[00:34:00.750]most of that feeder cattle crop was a result
[00:34:05.130]of a beef cow slaughter that happened in 2020.
[00:34:08.990]So, when we're talking about feeder cattle inventory
[00:34:12.860]this year, it's like,
[00:34:14.100]we already kind of have an idea of supply.
[00:34:17.750]This number is increasing quite a bit.
[00:34:21.010]So, what this ends up doing is
[00:34:22.990]having a delay in the cattle inventory.
[00:34:26.590]So, this is percent change in the cattle inventory.
[00:34:29.730]As we start to see beef cow slaughter goes up,
[00:34:33.832]basically what happens is the next year,
[00:34:36.270]when we get the calf crop report,
[00:34:37.900]we see that inventory is down.
[00:34:40.352]And so, when I was making the statement that
[00:34:43.160]we're in contraction or that we are at
[00:34:45.300]pretty much all time highs, it's because we were at,
[00:34:48.450]we're entering this downturn of the cycle.
[00:34:51.560]So, every blue line and red line, this is one cattle cycle,
[00:34:56.550]essentially, cause inventories go up,
[00:34:59.590]then they come down.
[00:35:00.423]Then they go up, then they go down.
[00:35:02.060]Then they go up, and then they come down.
[00:35:03.910]So we were actually at peak inventories in 2019.
[00:35:09.267]2020 was kind of a screwy year,
[00:35:12.460]but we're actually, for all intents and purposes,
[00:35:16.540]in pretty severe contraction mode right now.
[00:35:20.420]What I didn't mention is that there's potential
[00:35:26.260]feeder cattle price downward pressure due to the drought.
[00:35:32.980]The example, best example that I can give is, like,
[00:35:36.130]if you're in New Mexico and you have coal cows,
[00:35:39.800]you're not going to ship them to Nebraska
[00:35:42.420]to be fed most often, right?
[00:35:43.870]You're just going to take him to the local market
[00:35:46.200]and sell them.
[00:35:47.690]Feeder cattle are different.
[00:35:49.670]So, you can buy drought distressed feeder cattle,
[00:35:53.330]and ship them all the way to Nebraska feedlots.
[00:35:56.640]And so, there is a potential for a downward pressure
[00:35:59.400]on feeder cattle prices if we see, you know,
[00:36:02.480]as we're seeing lots of drought distressed cattle,
[00:36:06.050]potentially in our Nebraska feedlots, so.

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