2023 could be a big year for the livestock markets in terms of profits and losses. This is what a new report from HTS Commodities shows.
A tightening of livestock supplies could be an asset for the prices of feeder cows and live cattle. However, recession and rising interest rates can be problematic for the industry.
Livestock supply is one side of the equation and demand is the other part of the price equation. With the US economy weakening, HTS Commodities believes demand-related pressures will come from the mobilization side of the business. These demand pressures can create headwinds for live cattle prices.
If the packer represents both supply (beef) and demand (live cattle), highlighting key variables that affect each part of the live cattle price equation could help enable a feedlot operator’s risk management approach in 2023.
2023 vs. 2015
The question for many is how the livestock industry differs in 2023 from 2015.
It is no secret that drought in the major cattle-producing western states has caused the depletion of livestock (cattle and calves).
Unlike 2015. The US cattle industry will have to navigate a slew of macro challenges: a looming global recession, stubborn inflation, rising interest rates, and a strong dollar. In 2023, the United States of America Cattle Feeder is facing global, domestic, and regional supply shortages of corn and wheat.
The cost of capital and credit standards will be higher in 2023 than they were in 2015. This translates into higher lending rates for livestock feed operations. These costs can create structural headwinds for the consumer, the feedlot, and the packer.
As the US cattle industry moves from a contraction to an expansion phase, HTS Commodities could see three upsides for the market.
1. When the breeding herd in the US starts to expand and the cow/calves operators start holding breeding stock, the market will be in short supply. Contractual procurement will support higher prices for feed cows, as well as for live cattle and beef.
2. Although the local economy is weak, the labor market remains strong, and unemployment remains low. If unemployment and wage growth continue to grow – domestic demand for beef can remain resilient.
3. As the cattle herd expands and supplies tighten, the cattle feeder must be in a position to exert price pressure on the packer in the cash markets.
There are always two sides to the story. As the USA cattle industry moves into an expansion phase, HTS Commodities believes there will be three downward trends developing:
1. In 2023, the US livestock industry will begin to expand at the same time that the domestic economy slows and interest rates rise. Slowing economic growth could dampen domestic demand and demand for exported beef.
2. If cattle prices are rising while beef demand is slowing, packing margins may come under pressure. History has shown that as packing margins contract, packers will find ways to slow the pace of slaughter to help reduce price hikes in the local cash markets.
3. Corn basis in Hereford, Dumas, and other major cattle feeding areas in Texas are at or near record levels. This can limit the time the livestock feeder wants to feed the animals. If packers start to slow down the weekly slaughter pace, we see the potential for leverage shifting from the feedlot operator to the packer.
There are three main points to take away from the report.
1. The probability of a third consecutive La Nina weather pattern is decreasing, which should help bring moisture to the previously drought-stricken western and southwestern regions.
2. As drought decreases, the formation of emerging supply and demand will provide participants throughout the cattle and beef supply chains with opportunities for financial gain.
3. Despite the bullish outlook for supply, there are several price risks lurking in 2023 in the livestock feed and packing industries that could threaten profit margins.
Source: HTS Commodities