2023 could be quite a year in the profit and loss livestock markets. This is evident from a new report from HTS Commodities.
Tightening livestock supplies could boost feed and live cattle prices. However, a recession and high interest rates could spell trouble for the industry.
Livestock supply is one side of the equation and demand is the other part of the price equation. As the US economy weakens, HTS Commodities believes demand-related pressures will come from the packaging side of the business. This demand pressure could create headwinds for live cattle prices.
If the packer represents both supply (beef) and demand (live cattle), highlighting the leading variables that influence each part of the live cattle price equation can strengthen the rangeland operator’s risk management approach in 2023.
2023 vs 2015
The question for many is how livestock farming will be different in 2023 than in 2015.
It is no secret that the drought in the major western cattle-producing states has led to the liquidation of breeding stock (cows and heifers).
Unlike 2015, the United States livestock industry will face a plethora of macroeconomic challenges: looming global recession, persistent inflation, rising interest rates and a strong dollar. In 2023, the US animal feed producer will face global, domestic and regional corn and wheat shortages.
Capital costs and credit terms will be higher in 2023 than in 2015. This translates into higher borrowing rates for feed businesses. These costs can create structural headwinds for the consumer, the feed lot and the packer.
The bulls
As the US livestock industry transitions from contraction to expansion, HTS Commodities sees three bull market trends.
1. When the breeding herd in the US starts to expand and cow/veal farmers start breeding stock, there will be a shortage of supplies on the market. Contracting supplies will support higher feedstock prices along with livestock and beef prices.
2. Despite the weakening domestic economy, the labor market remains strong and unemployment remains low. If unemployment and wage growth continue to grow, domestic demand for beef could remain resilient.
3. As herd size increases and supply becomes tighter, the feeder should be able to exert price leverage over the packer in the money markets.
The bears
There are always two sides to a story. As the US livestock industry transitions into the expansion phase, HTS Commodities believes three bearish trends will develop:
1. In 2023, the US livestock industry will begin to grow as the domestic economy slows and interest rates rise. Slowing economic growth may suppress domestic and international demand for beef.
2. If livestock prices rise while demand for beef falls, packers’ margins could come under pressure. History has shown that as packaging margins shrink, packers will find ways to slow down the pace of slaughter to help moderate price increases in local money markets.
3. The corn base in Hereford, Dumas and other key Texas feed areas is at or near record levels. This can limit the time the livestock feeder wants to feed the animals. If the packers start to slow down the weekly slaughter rate, we see the potential for price leverage to shift from the feedlot operator to the packer.
Take away food
There are three main points to take away from the report.
1. The likelihood of a third consecutive La Nina weather pattern is declining, which should help bring moisture to the drought-stricken west and southwest.
2. As the drought eases, the emerging supply and demand configuration will provide opportunities for participants in the livestock and beef supply chains to benefit financially.
3. Despite the rising supply outlook, numerous price risks loom for the feed and packaging industry in 2023 that could threaten profit margins.
Source: HTS Raw Materials