Market correction tied to inventory management

Cattlemen's College

Wes Tiemann, Manager of Strategic Services for the Missouri Cattlemen’s Association, gives everyone their marching orders as the Cattlemen’s College begins at the MCA Convention Jan.9 in Osage Beach, Missouri. Cattlemen’s College was sponsored by Zoetis. (Journal photo by Doug Rich.)

Posted: Monday, January 25, 2016 8:00 am

By Doug Rich | 0 comments

The cattle industry is still in the expansion phase but total herd numbers are historically low, according to Brett Crosby with Custom Ag Solutions. Crosby provided market analysis at the Missouri Cattlemen’s Association annual convention Jan. 9 in Osage Beach, Missouri.

Crosby examined what caused the correction in the cattle markets, why retail prices have remained high even though cattle markets have declined and what is in store for the near future in the cattle business.

Crosby said the correction started when the packers began managing their inventories. This caused feedlots to feed cattle to heavier weights. The resulting heavier slaughter weights put more pounds of beef into the system. Adding insult to injury was the fact that imports of beef products were up and exports were down.

“In 2014, the packers found themselves very short bought,” Crosby said. “In other words, there were not nearly enough cattle to fill their orders. Packers were paying very high prices for cattle in the last half of 2014. They saw low inventories again in May and they started backing up their kill to push cattle forward a little bit so they would not have this inventory hole.”

Crosby noted slaughter weights year over year were up 20 to 40 pounds in some classes of animals. Heavier weight cattle being slaughtered in this country and more imports resulted in cold storage numbers going up over 400 million pounds.

“Packers were still not making much money because they were killing cattle they had forward contracted,” Crosby said.

When the correction occurred it created a disconnect between cattle prices and retail prices for beef. Crosby said this happened because grocers were still paying the same price for beef because the distributors did not lower their price.

Why didn’t distributors lower their prices? Because packers told the not to lower their prices, Crosby said. Margins were captured by the distributors rather than the grocers.

“Packers saw that this was a temporary drop,” Crosby said. “Once we worked through the heavier cattle we have seen a rebound in boxed beef prices. It was an inventory management issue.”

Crosby said going forward inventory problems could continue going to the first quarter of 2016. Cattle weights are still very heavy. He expects slaughter weights to remain high.

“From everything we see there should be a rebound,” Crosby said. “Not to all time highs but we could see the feeder cattle index go up another $30 to $40. We could see fat cattle trade in cash at $150. I am not saying it will happen but it is in the realm of probability.”

Crosby told the cattlemen to become familiar with price management tools and to develop marketing flexibility. Most cattle will turn a profit at least once in the marketing chain.