More twists and turns to come
Although the coronavirus pandemic has certainly not been a joy ride of any kind, the cattle market has been on a roller coaster of sorts with ranchers wondering what will be around the next corner. Oklahoma State University Cooperative Extension Livestock Marketing Specialist Derrell Peel said although the cattle industry has been through a number of black swan events over the years, this one is truly unique from a cattle industry perspective.
“Many of the things that have happened to us in the past, like BSE in 2003 and the Cargill fire last year, are things that happened within the beef industry,” he explained. “Certainly there are some parallels in the general pattern of what we’ve seen in the last few weeks in both the boxed beef side as well as live and feeder cattle. The thing about those that was different is that they were specific events that shocked you when they happened, so they are a black swan, but then they’re over and you start thinking about how you recover. 9/11 was obviously bigger than the cattle markets and was more of a general economic shock, but again it was a single event and then we went into recovery mode.”
Peel said when pandemic in the United States and globally subsides the aftermath of macro repercussions will hit. He said it may have some similarities to disasters the cattle industry has overcome in the past, but it is also different because experts are still trying to figure out exactly where we peak in terms of how bad coronavirus is from a human health standpoint.
“I’m comfortable saying the U.S. is in a recession right now, although we won’t know that officially for some time and there is a good chance we are in a global recession as well,” Peel added.
Peel said the other thing to keep in mind is that we were looking at a somewhat slower growth forecast this year before any of this happened.
“We had a fairly robust economy, low unemployment and no major macroeconomic issues other than we knew that we were looking at a little slower growth,” he said. “Coming out of the last recession, the economy had been driven largely by consumer spending. One of the things that we sort of masked with the strength of the economy going into this thing was that the manufacturing sectors still had some concerns.”
Peel said he sees two implications stemming from these facts; one is that there is the potential for a fairly strong recovery at some point, but the other concern is just how big of a shock this is going to be to the economy because the thing that is being hit the most is consumer spending. He said this will play into a lot of what happens over the next three to nine months.
What does the magic eight ball predict for markets?
“It has been said that economics is not something you have to understand because it works on autopilot most of the time,” Peel explained. “It’s kind of like driving a car—you don’t really have to know how it works until it breaks down. When we get a shock like this, we really start to see how markets and economies work and certainly that has been true of the beef markets the last couple of weeks.”
With the shutdowns of restaurants and travel, we have seen a great percentage of the food service beef purchases shift to the retail side, leading to higher boxed beef prices. Additionally, people are purchasing more meat to store and be prepared for all the uncertainty surrounding the virus.
“So if they are buying two packages of meat instead of one, that is an immediate doubling of meat at the grocery store,” Peel said. “If you think about any given day, grocery stores can’t just call up whoever they get their meat from and say I need more meat tomorrow. It doesn’t work that way. Grocery stores are selling meat today that they started planning sales for two or three months ago at a minimum, the ads were written at least a month ago and the actual purchases of the meat were more than likely four to six weeks ago. There’s just not a lot of freely available meat in the market any given day.”
Additionally, he said meat being processed at the packing plant level this week is already spoken for, for at least the next two weeks. Although some question if the market is already broken right now, Peels said he disagrees and said markets are functioning exactly like we would expect them to with the things that have happened. However, since this situation has put markets under unprecedented pressure, Peel says it has allowed us to examine different aspects of the cattle industry under new microscopes.
“I think what is being illustrated in the short-run is there is no direct connection between what is going on with cattle markets today and what is going on in the beef market,” he said. “They’re connected over a longer period of time obviously, but we never really think about that fact that they’re really two different streams of products running at one point in time.”
Peel said cattle markets have been reacting to the stock market drops and the overall macroeconomic concerns along with a big part of the futures markets for live and feeder cattle reacting to the possibilities of disruption of labor forces and that could lead to a significant disruption in the actual flow of product.
Another point he makes is the fact there is not a beef shortage, and in fact beef production has been up significantly. The increase in demand with people filling up their freezers, which is more than they are consuming immediately, could have some market implications in the future.
“It’s kind of like when a hurricane’s coming and everyone runs out to top off their gas tank, you can run some gas stations empty in the short-run,” Peel said.
According to Peel, from the demand standpoint, the key will be those longer-term macro considerations. Beef is the most expensive of the meats and demand tends to be rather sensitive to the overall economy. It has to be a good value and consumers have to have money to purchase it, making it more vulnerable during a recession.
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Staying afloat in 2020
Prior to the coronavirus spreading through the country, beef economists had predicted calf prices to be higher for the second half of the year. Although they knew there would be a surplus of beef in the early part of 2020, which would put some pressure on markets, prices were definitely projected to be higher than last fall. At this point, the coronavirus pandemic has forced the cattle industry to lower expectations from where they were. However, Peel said there is still the possibility of prices improving before 2020 is over.
“For the second half of the year, we can still see a significant support of these markets, but the question is how the macro system will change the demand,” he said. “We were counting on the international markets in terms of protein exports for this year. Even though with everything that has happened with coronavirus is seems like all the other things that were strengthening that protein demand abroad have gone away, but they’re still there. There’s still an African swine fever impact in China, leading to protein demands there, but at the same time, their economy has been hit very hard by coronavirus.”
The next natural question cattlemen are asking is how they can weather this storm; Peel said producers need to change their focus, try to be flexible and not sell animals in a down market.
“We could have fall calves that are going to be weaned here in the upcoming weeks, we’re kind of past marketing wheat pasture cattle out of the southern Plains, but some of those guys may have found a way to hang onto some of those calves,” Peel said. “I don’t know that I have a lot of reason to expect a full recovery of everything in the next 30 to even 60 days, but we have seen some bounces in the terms of the futures. There are some opportunities to at least limit the damage if we have some cattle that we don’t have that much flexibility.”
Finally, Peel said cattlemen should rethink their focus to be more on financial management at this point.
“This is not going to be as good of a year as we thought it was, so I think you need to manage for financials and not some much for marketing,” he said. “Marketing is going to be important as far as being flexible and giving it as much time as we can, up to a point. If nothing else, we need to change our focus so this is just a bad year and not our last year in the cattle business. We’re probably going to spend this year on defense rather than offense for at least the next three months.”
Lacey Newlin can be reached at 580-748-1892 or [email protected].