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Weighing The Market

published: December 10th 2021
by: Wes Ishmael

Market optimism grows

Negotiated cash fed cattle marketing leverage finally appears to be tilting back toward producers with prices increasing about $18/cwt. from the first week of October to the first few days of December.
    For perspective, the five-area direct average fed steer price was $140.44/cwt. on a live basis the week ending Dec. 5 — the highest since mid-2017. It was $122.56 for the week ending Oct. 3.
    “As 2021 winds to a close, cattle markets seem to finally be able to move out from under the specter of the pandemic impacts that began 18 months ago,” says Derrell Peel, Exten-sion livestock marketing specialist at Oklahoma State University, in his late-November weekly market comments. “…The recent breakout of fed cattle markets, after struggling under the weight of beef packer capacity constraints, clears the way for cattle markets to move forward with the optimism that has been building in the industry in recent months.”
    USDA’s Economic Re-search Service (ERS) increased the projected annual five-area direct average steer price for this year by $1.25 to $121.31/ cwt., in the November World Agricultural Supply and Demand Estimates (WASDE), based on continued firm demand.
    The annual average price for next year was forecast $1 higher at $130. Prices were forecast at $132 in the first quarter, $129 in the second quarter and at $127 in the third quarter.
    “Although packers will still have healthy margins compared to pre-pandemic levels, the price spread between beef and cattle will begin a multi-year narrowing trend in 2022,” say Rabobank analysts, in the Rabobank Global Animal Protein Outlook 2022. “Even as domestic beef demand (willingness to pay) falls slightly from its pandemic highs, continued export growth, declining beef production and general economic inflation will provide price support.”
Calf and feeder cattle price moving higher
    Fed cattle price strength is underpinning calf and feeder cattle prices, which are expected to continue rising through the winter.
    ERS increased the expected fourth-quarter feeder steer price (750-800 lbs., basis Oklahoma City) by $3 to $154/cwt., compared to the previous monthly projection. That was based on current price strength and improved prospects of winter pasturing stocker cattle.
    In the November Live-stock, Dairy and Poultry Outlook, ERS forecast average feeder steer price next year at $155.50, compared to the projected average price of $145.55 this year. ERS projects the average feeder steer price at $153 in the first quarter, $151 in the second quarter and $156 in the third quarter.
    Moreover, Feeder Cattle futures prices suggest continued gains through next year, despite the significant increase in feedlot cost of gain.
    Part of current cattle market optimism stems from ongoing domestic and international U.S. beef demand coupled with cyclically declining cattle numbers.
    “The beef cow herd has been declining since 2019 and declined even faster in 2021. It will decline again in 2022 and likely in 2023,” Peel says. “However, strong domestic beef de-mand bolstered by even stronger demand and potential in international markets suggests that cyclical expansion could resume in the not-too-distant fu-ture. Exactly what the future path will be remains to be determined but producers should consider strategic and tactical plans for industry outcomes.”
Input costs  soar
    Besides lingering drought for some producers, plenty of margin challenges remain for all producers.
    Start with the economy and another COVID jolt of uncertainty with the new variant (omicron).
    Global economic recovery is continuing but its momentum has eased and is becoming increasingly imbalanced according to the latest Economic Out-look from the Organization for Economic Cooperation and Development (OE CD).
    “The strong rebound we have seen is now easing and supply bottlenecks, rising inflation, and the continuing impact of the pandemic are clouding the horizon,” says OECD Secretary-General Mathias Cor-mann. “The risks and uncertainties are large, as is being seen with the emergence of the omicron variant, aggravating the imbalances and threatening the recovery. Keeping the recovery strong and on track will entail addressing a number of imbalances, but above all it will mean managing the health crisis through better international coordination, improving health systems and massively stepping up vaccination programs worldwide.”
    OECD projects real global GDP growth at 5.6% this year, 4.5% next year and 3.2% in 2023.
    For the U.S., OECD projects real GDP at 5.6% this year, 3.7% next year and 2.4% in 2023.
    In the meantime, supply chain disruptions and shifting demand patterns continue to help fuel price inflation.
    Since the beginning of this year, average cost of gain for steers is up 32.8% ($27/cwt.) and heifer cost of gain is up 37.2% ($32), according to analysts with the Livestock Marketing Information Center (LM IC), in a November Live-stock Monitor. That’s based on data from Kansas State University’s (KSU) Focus on Feedlots. Average cost of gain in KSU’s September data was $109.29/cwt. for steers and $118.34 for heifers, the priciest in about eight years.
    “It is also worth noting that the KSU Feedlot average cost of gain data does not include the cost of feeder, yardage, and interest costs,” LMIC analysts say. “Higher average cost of gain is primarily due to rising feed costs for corn, up 47.7% ($2.25) and ground alfalfa hay, up 31.2% ($43) since the start of the year. The higher cost of gain will also motivate cattle feeders to market cattle quicker.”
    Animal protein supply chains face across-the-board cost inflation, according to the Rabobank outlook, with the most significant increases coming in four key areas – animal feed, labor, energy and freight, according to the report.
    “This next year has the potential to accelerate structural change as a result of escalating costs,” says Christine McCracken, senior animal protein analyst for Rabobank. “Success will most likely go the players that adapt to the changing business environment; embracing consumer preferences for sustainability and preparing for a surge in demand as economies continue to reopen and adjust following COVID-19-induced lockdowns.”

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