CattleFax Analysts Predict Milder Drought And Tough Profit Margins

Weather worries still in the forecast, plus high input costs, penny-pinching consumers and volatile markets.

Published on: Feb 8, 2013

CattleFax analysts are predicting more drought this year, though not as severe or long-lasting, more packing plant and feedlot closures, and continued high prices and market volatility.

Those predictions were made in the company’s annual outlook seminar during the National Cattlemen’s Beef Association meeting in Tampa, Florida, on Friday morning. It’s the one time each year the members-only organization shares a large amount of data with the public.

“We’re going to have record-high prices, yet it may be hard to make money because we’re going to have record-high breakevens,” said Randy Blach, CEO of CattleFax.

It takes 112% more capital today than in the year 2000 and volatility is high and will remain that way, Blach added. In fact, the weekly change in corn price in 2012 was the equivalent of a $20 variation in breakeven prices, he added.

Weather worries still in the forecast, plus high input costs, penny-pinching consumers and volatile markets.
Weather worries still in the forecast, plus high input costs, penny-pinching consumers and volatile markets.

Further, Blach and the other analysts said high prices of beef are certainly keeping some downward pressure on demand.

“Packers didn’t make any money. Wholesalers didn’t make any money. Retailers didn’t make any money. Does that tell you prices are running up against a little bit of a ceiling, there?” Blach said.

The packing industry is still over capacity by 12% for fed-cattle plants and 23% for non-fed or cow-slaughter plants. The feeding industry is over value by 25-30%.

Art Douglas, meteorologist for the group, said the stalled El Nino-La Nina transition is really casting uncertainty on weather forecasts for this crop year. Cool waters in the eastern Pacific are promising more La Nina conditions and drought for the West, Southwest and Southern Plains in the near term.

Warmer sea temperatures in the western Pacific are suggesting a return to El Nino conditions later this year but that remains a big question mark.

Douglas said the warm western waters and cool eastern Pacific waters “is a classic pattern that’s associated with drought in the Southwest and the Southern Plains.”

Transitions between the two patterns are simply hard to forecast, Douglas said.

“We really don’t know where we’re going right now with this La Nina situation,” he said. “But I think we’re going to see more La Nina with more drought concentrated in the central Plains.

Into the summer, Douglas said warming sea temperatures and the various computer weather models lead him to believe La Nina conditions will not return and strong drought looks unlikely. However he said the dry soils in the Plains are likely to keep the region warmer than normal, which won’t help.

The CattleFax analysts gave these price predictions for 2013:

- Fed cattle: Average of $126 per cwt.

- 750-pound steers: Average of $155 per cwt.

- 550-pound steers: $175 per cwt.

- Cull cows: $88 per cwt.

- Bred females: $1,550 per head

- Corn: $610 per bushel

Of course, the analysts noted this is assuming serious drought doesn’t return and U.S. and overseas corn production is closer to trend-line yields.

Blach said the group doesn’t expect much higher prices from commodities in the future because the run up in in prices over recent years has been so extreme compared to other places money managers can put money.

In one chart Blach showed from 2004 to 2012 corn rose 342%, soybeans rose 259%, live cattle rose 84%, lean hogs rose 119%, and gasoline rose 300%. For comparison, the S&P 500 stock index showed a 36% increase in the same time frame.

Exports will continue to be an extremely important part of the beef market and U.S. consumer demand for all meats looks like it will remain a little soft with so many consumers pinching pennies, paying off debt and/or out of work.

CattleFax Analysts Predict Milder Drought And Tough Profit Margins

Adding weakness: U.S. consumer income is down and that has made demand for beef softer, especially considering it is the highest-priced protein in the case.