Riding the Wave
By: Terri Queck-Matzie
Expect the unexpected is the word from Dr. Nevil Speer, Vice president, U.S. Operations with AgriClear.
“Volatility is really the key,” says Speer, who highlighted the message at the Iowa Cattlemen’s Association annual convention in Des Moines. “You know how tough and challenging commodity markets are. They can eat you up any day of the week. But that’s were we are. That’s the reality we’re dealing with.”
With markets up one day and down the next, Speer says making sound decisions is problematic, and even understanding the forces behind the flux doesn’t always help.
“That’s the challenges we’re facing. And they’re very real.”
One year ago, cattle producers on every rung of the system were feeling pretty good. Prices had rebounded from the bottom of the financial crisis to reach all-time highs. “We doubled the value of live cattle in five years. That was unprecedented,” says Speer.
The market goes where the cut-out goes
Beef is a consumer-driven business. “There are new dynamics in supply and new dynamics in demand,” says Speer, “and we’re putting more capital at risk all the time.”
Beef going into cold storage continues to mount. At the end of October, the USDA put inventories at 512 million pounds, approximately one week’s worth of kill, making 2015 the largest October on record. “Beef supplies are not current and that’s keeping a lid on prices,” says Speer.
In addition, cattle weights have increased. Placements are down in the lighter categories and up in the 800-pound or more slots. “Stockers and hanging on and leaving cattle on pasture longer,” explains Speer.
“And the old adage still holds – heavy in, heavy out. Feedyards don’t want light animals. They want to bring them in heavy. They’re fighting the market, too.”
Early December saw 1,390 slaughter weights. “The meat supply is growing, but it’s still front-end supply.”
Speer says while weights are beginning to come down some, producers can continue to see that trend through at least May of 2016.
It’s a global market
Further complicating the picture is the worldwide value of the U.S. dollar. Mid-January put the Canadian dollar at a 13-year low compared to the U.S. currency, a pattern seen around the globe.
“On the one hand, that’s a good thing because it signals a strong economy,” says Speer. “But it’s a double-edged sword.” For an industry that relies heavily on an active export market, one of those sides feels dull. “It’s a paradigm we haven’t seen for about 30 years.” Monetary policy set by the U.S. will be key going forward, as will foreign economies, with crucial markets recently showing their instability.
Consumer confidence in beef quality continues to influence the market as well. Prime and branded beef sales are on the rise, with premiums holding steady despite the growing supply. One in five dollars coming into the business now comes from Prime and branded products, according to Speer, with total dollars generated passing Select sales for the first time. “Consumers are telling us they like a high-quality product and we’ve responded. That gives us somewhat of a buffer in the commodities game.”
Live cattle contracts are at record lows, and investors are unwinding from positions in futures contracts. “There are less hedging opportunities for sellers,” adds Speer, “and a lot of market noise. It’s a very complex business and external events like foreign currency and external investors – added to the speed of real-time investment action – make market management nearly impossible.”
Speer tells producers to lock in margins, pay off debt, refinance long-term debt and increase working capital as best they can. “Make sure you have enough money sitting out there in case something happens.” In other words, control the few things you can.
There are two sides to risk
“The good news there is also opportunity,” says Speer. “Risk protection against the down side is important, but there’s also the risk of missed opportunity. Both sides are equally important.” He urges cattlemen to study and learn.
“What we do inside is just as important as what we do outside. Getting information is not a waste of time.” That especially applies in this age of extreme volatility – volatility that is likely to continue for some time to come. “It can take years for factors in a complex business like beef to unwind and correct themselves.”
And remember there’s more than capital at risk. Keep your perspective.
Speer cautions against the emotional pitfalls at a time when making a decision can be the day’s biggest challenge. “A lot of emotion can get tied up with money,” he says. “Especially when the dollars are so high. It can be paralyzing. If you make a mistake, it’s a lot of money.”
“Celebrate the little victories, and forgive yourself for the mistakes,” adds Speer. “All you know is today. Just do the best you can.”