The stocker business is inherently risky, except for the fact that the buyer always starts with live calves. They may not live long, but they are alive nonetheless when they are purchased. This is not a story about the woes of producing stocker calves. Rather, it is a story about marketing cattle in 2023 and some lessons that should have been learned from the good ol' days of 2013 through 2017. Hopefully, lessons of old will assist stocker producers navigate the waters of the current environment.
This story could start one of several ways, so here is one of them. Once upon a time, the majority of the U.S. suffered from drought. This drought resulted in a lot of cows and heifers being slaughtered because many producers could not afford to purchase high-priced feed. This resulted in a smaller beef cattle herd and a smaller calf crop, which resulted in cattle prices skyrocketing a few years later. Higher prices excited producers, and many producers turned large profits.
Let us stop the story right there – because that is how the drought of 2011 and 2012 started the roller coaster of cattle prices from 2013 through 2017. At the same time, that same story has played out before our very eyes once again in 2022. The question or challenge now is attempting to use experience from nearly a decade ago to improve decision-making through the next several years. Today’s market is not identical to the previous cycle and uncertainty remains. However, proof from the past can certainly aid in success and limiting failures today.
A good place to start is with beef cow inventory. Beef cow inventory from 2013 through 2015 ranged from 28.96 million head (2014) to 29.63 million head (2013). Beef cow inventory then increased until 2019 (31.69 million head). From 2019 to 2022, inventory declined to 30.13 million head. The 2023 beef cow inventory will be made public later this month, but the educated guess at the time of this writing is 29.1 million head. Thus, the expectation is that beef cow inventory will be extremely similar to 2014. This in and of itself provides a great deal of optimism for cattle markets as cattle feeders and packers will be competing for cattle.
Similar to the previous period, harvested feedstuff prices moving into 2023 are relatively high. High feed prices will slow the cattle price increase to some degree, as will another round of drought. The point here is: Producers should not expect cattle prices to elevate as quickly as they did in 2014 and 2015 this time around because feed grain and hay prices will have to moderate to some degree. Additionally, many producers will need some type of certainty that drought has subsided to retain heifers in 2023. If heifer retention begins in earnest, then cattle prices will push higher.
It may be beneficial at this point to remind market participants about the price action that took place from 2011 forward. At the end of 2011 and beginning of 2012, the Chicago Mercantile Exchange (CME) feeder cattle index value was in the mid- to upper $140s. The market attempted to run higher in the spring of 2012 before faltering, and ended 2012 exactly where it started. The start of 2013 was slow, but when there was confidence that a strong corn and hay crop was coming to market, cattle prices took off and ended the year in the mid-$160s. Prices continued higher in 2014 and reached above $240 before moderating through the first eight months of 2015. By the end of 2015, there was reason for concern as the CME feeder cattle index was in the $150s. Every time the market attempted to bounce back, it was shot down and found itself in the low $130s by the end of 2016. The market did find some footing in 2017 but still had a few setbacks in 2018. The market spent most of its time trading between $130 and $150 from 2017 through 2019.
What does this mean?
The biggest lesson one can learn from the previous cycle is that producers do not control the daily, weekly or monthly cash price, but they do control the marketing decisions of their cattle. The higher prices go, the more risk there is in prices declining. Similarly, the lower prices go, the more risk there is of prices increasing. This means there is good reason to manage price risk. Stocker producers are working on a margin, and the margin may look like it is going to explode to record levels when market prices are increasing. However, the inability to pinpoint when prices will decline is where extremely strong margins turn into a disaster. This means producers who currently use price risk management strategies should continue to use those strategies. Getting in and out of the market could be more disastrous than not being in it at all. To those who do not use price risk management, there is nothing wrong with locking in strong profits and missing some of the top side. There is something wrong with making a lot of money, spending it and then losing a lot of money.
The last takeaway from this is: What goes up will come down. It is hard to know how high prices will go and the exact timing of everything, but history tells us that cattle prices will decline at some point after they increase. Many times, cattle prices decrease more quickly than we as producers anticipate.
