Cattle Cycles and Inventory Adjustments: The Long and the Short

Transcription

1 Cattle Cycles and Inventory Adjustments: The Long and the Short Eric Associate Professor Department of Agricultural Economics and Economics Rocky Mountain Intertribal Agriculture Council Conference August 21, 2015

2 Outline Supply and Demand for U.S. Beef Prices in The Beef Market Market Outlook: Where is This Crazy Cattle Market Headed? Risk Management and Marketing Discussion

3 Domestic Demand for Beef Still Strong 12% FY YOY % Change in Beef Demand Index 10% 8% 6% 4% 2% 0% 2% 4% 6% Source: Bureau of Labor Statistics, USDA-ERS, Compiled & Analysis by LMIC

4 Export Demand Remains Steady 4,000 3,500 3,000 Annual US Beef and Veal Trade (Carcass Weight) Imports + 31 % Million Pounds 2,500 2,000 1,500 Exports 1, Source: USDA-ERS, USDA-FAS, and LMIC; Forecast by WADSE Report (8/2015)

5 Global Production is Flat 1,200 World Cattle Inventory World Beef Production 60 Million Head (as of Jan. 1) 1,100 1, Million Metric Tons Source: USDA-FAS, LMIC, and MSU AMPC

6 U.S. Beef Inventory Starting to Rebound U.S. Cattle Inventory U.S. Beef Production Million Head Billion Pounds Source: USDA-ERS, LMIC, and MSU AMPC

7 Inventory Adjustments in OK and TX Texas Beef Cow Inventory (in Millions) TEXAS OKLAHOMA 18.3% 23.4% Oklahoma Beef Cow Inventory (in Millions) Source: USDA-ERS

8 Estimated Marginal Effect from a 10% Shock to Hay Production

9 Estimated Cumulative Effect from a 10% Shock to Hay Production

10 The 2002 Drought in Colorado Beef Cow Inventory (in Thousands) Hay Production (Million Tons) Beef Cow Inventory Detrended Hay Production 3.3 Predicted Beef Cow Inventory

11 The 2002 Drought in Wyoming Beef Cow Inventory (in Thousands) Hay Production (Million Tons) Beef Cow Inventory Detrended Hay Production 1.7 Predicted Beef Cow Inventory

12 Drought Persists in Montana U.S. Drought Monitor August 18, 2015 (Released Thursday, Aug. 20, 2015) Valid 8 a.m. EDT S SL S SL SL SL L Drought Impact Types: S S Delineates dominant impacts S = Short-Term, typically less than 6 months (e.g. agriculture, grasslands) Author: Chris Fenimore NCEI/NESDIS/NOAA S SL L = Long-Term, typically greater than 6 months (e.g. hydrology, ecology) Intensity: D0 Abnormally Dry D1 Moderate Drought D2 Severe Drought D3 Extreme Drought D4 Exceptional Drought SL SSL L SL SL S S S S SL The Drought Monitor focuses on broadscale conditions. Local conditions may vary. See accompanying text summary for forecast statements.

13 Strong Growth in Feeder Cattle Price $250 Nominal Nearby Futures Cattle Prices $230 $210 $190 Feeder Live $ per cwt $170 $150 $130 $110 $90 $70 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Source: CME Group, Compiled & Analysis by LMIC

14 Montana Prices Follow Futures Movements $300 Nominal Local and Futures Cattle Prices $250 $ per cwt $200 $150 $100 CME Nearby Feeder Futures MT Lb Steer $50 $0 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Source: CME Group, Compiled & Analysis by LMIC

15 What about Calf Prices? Dollars Per Hundredweight Real Calf Price (2014 Dollars) Average Price Trend Source: Supplied by Dr. Gary Brester, LMIC

16 Feedlot Returns Source: Agmanager.com, Kansas State University

17 Where is this Price Coming From? In an efficient market, prices fully reflect available information. Eugene Fama

18 Short Run What We Know in the Short Run Historical and implied volatility are back to around 12%. Rebuilding has started and expected to continue for at least two more years. Drought persists in West and entering Western Montana. Strong demand for feeder cattle at feedlots. Demand for beef has been strong.

19 Short Run Futures Prices (As of 8/18/2015 Previous Settlement) no basis adjustment Commodity Feeder Cattle Live Cattle Units $ per lb $ per lb Nearby Oct Nov/Dec Feb/Mar Apr

20 Short Run So, What Will Next Year Look Like?

21 Short Run Expected Cash Estimate from BeefBasis.com

22 Long Run What We Know in the Long Run Rising cost of labor and land. Crop insurance make diversification with cattle less necessary. Population and income growth expected in foreign markets. Global competition is likely from Australia, NZ, Brazil, Uruguay, and India. Gap between live and feeder cattle prices likely to shrink (eventually). Rebuilding is currently occuring, but for how long?

23 Price Risk Management Issues What if you know that prices will rise between now and delivery? No risk management necessary Speculate What if you are uncertain about prices? Forward contract Need to find a willing partner. Partner is likely to add a premium to eliminate all your risk.

24 Price Risk Management Issues (cont.) What if you are uncertain about prices? Short hedge (futures market) Basis risk remains. Contact size might not match up perfectly. Margin calls add timing issue. Eliminates almost all risk. Put Option (Options market) Basis risk remains. Contact size might not match up perfectly. Pay premium, but still might benefit from favorable prices.

25 Other Risk Management Issues What if you are uncertain about weather? Livestock Forage Program Livestock Indemnity Program Emergency Assistance for Livestock, Honeybees, and Farm-raised Fish

26 Livestock Forage Program Native Pasture Program Year Eligible County Payment Months Alaska 5 Map Scales Vary Data Update - 08/17/15 Hawaii Puerto Rico

27 Counties Eligible for LFP Payments in Montana, 2015 Beaverhead Deer Lodge Flathead Glacier Granite Lake Lewis and Clark Lincoln Mineral Missoula Pondera Powell Ravalli Sanders Silver Bow Note: 32 counties designations in 2012; 14 in 2013; 0 in 2014; 15 YTD in 2015.

28 In Summary...

29 In Summary... Rebuilding is occuring, especially in TX and OK. Increases in inventory will cause prices to stablilize or fall. It s a great time to consider risk management strategy. LFP is paying in most Western Montana counties.

30 Thank you for your time. Questions, comments, feedback?