A monthly column written exclusively for Beef Central by US market analyst, Steve Kay, publisher of US Cattle Buyers Weekly.
CATTLE feeding (lot feeding in Australia) can be a humbling experience.
One year you’re making money, the next you’re losing it.
US cattle feeders only a year ago were ending one of their most profitable 18 months in many years. But since then, they’ve lost all the equity they had built up and then some. This year will go down as the worst year of cattle feeding losses in the history of the US industry.
The US cattle feeding sector is dominated by multi-feedlot companies such as JBS Five Rivers, Cactus Feeders and Cargill Cattle Feeding. These three can feed nearly 1.9 million cattle at any one time – roughly twice the capacity of Australia’s entire grainfed sector.
But there are thousands of small family-owned feedlots in the US, and people who don’t own feedlots but who buy cattle and have them custom-fed. These two groups have likely suffered the biggest losses, as they don’t have the risk management expertise of large feeding operations.
Even the smartest hedging strategies, though, haven’t saved all US operations from losing hundreds of dollars per head. That’s because the futures market has been so volatile that it has been impossible at times to use it as a risk management tool.
The volatility is causing headaches up and down the beef production chain. Cow-calf and stocker operators, cattle feeders and packers all use the futures in various ways to lay off risk and attempt to set prices.
Tyson loses US$70m on hedges in September
The last point has made it extremely difficult for US packers trying to sell beef forward. If a packer wants to hedge a forward position on beef, he bundles together the items he is selling and then looks at the live cattle contracts.
For example, if he is selling a load of chuck rolls, he will hedge two loads of cattle. If he is selling a load of tenderloins, he will hedge three loads of cattle.
But the futures’ volatility makes it more difficult to know what level to hedge at. Tyson Foods, the industry’s largest beef processor, lost US$70 million in hedging loss just in September when the futures market collapsed.
The volatility is also impacting spreading or crushes as a risk management tool. Spreading involves two different contracts, e.g., the live cattle live hog contracts, or the February and August live cattle contracts.
A crush is when someone bundles together the components that make up the end product. For beef, it means using feeder cattle and corn futures as inputs and live cattle contracts as the output. Those using a crush would go long on the inputs and short on the output. A pork crush would use the live hog, corn and soybean contracts.
Cattle feeders began seeing losses in January despite weekly prices for fed cattle averaging US$160 to $170 per cwt. This was because they had paid record high prices for younger cattle the previous fall to place in feedlots. They kept “paying the price” for those expensive replacements all year, which reminds one of the old adage that “The money always runs out before the cattle.”
Cattle feeders thought a summer and annual low in prices was in place in late July. But the market collapsed in September to a new low the first week of October. The average price that week was 30 percent lower than the weekly high the first week of January. Prices rallied in October but then began to collapse again. Last week’s prices nearly put in another new low for the year.
Cattle feeding losses have thus remained as bad if not worse than at any time this year. Depending on the amount of hedging, losses have been between US$250 and $500 per head in recent months.
I heard of one group of cattle that sold last week with an average loss of US$800. This cattle feeder likely will be out of the business for some years.
Largest losses on record
Cattle feeders will experience the largest yearly feeding losses on record, says the Livestock Marketing Information Centre, which has tracked feeding margins since the 1970s.
In contrast, 2014 was the second-best year ever for cattle feeding, says LMIC director Jim Robb. LMIC uses a cash-to-cash criteria for its margin calculations. So it knows that feeding profits or losses for some feedlot operations are different to its averages.
Nonetheless, LMIC had losses averaging US$277 per head on a monthly basis through November. Cattle lost money every month, with the biggest losses coming in September (US$420 per head), October (US$455) and November (US$440).
December losses will be ugly as well because of the latest market collapse. Even if the annual losses are half the number estimated by LMIC, this would be the worst-ever year, says Robb.
But margins are set to improve soon. Cattle placed against last February had breakevens of US$190 per cwt. Cattle placed against next May have breakevens of US$145, he says.
May, though, is six months away and that breakeven is not hedgeable anyway.
The April live cattle contract hasn’t closed above US$140 per cwt since November 4 and is currently trading below US$130. A rally in the live cattle cash and futures markets might begin soon but it would be largely weather-induced.
A more lasting rally will depend on what the rest of the beef complex is also hoping for: that is, more consumer spending on beef. Such a trend though has been sorely lacking as the US beef industry enters the holiday season.