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A Look at the 2020 U.S. Beef Cattle Market and Current Economic Conditions
September, 2020
Chris Prevatt, UF/IFAS Range Cattle Research and Education Center, Ona
The last several months have been exceptionally stressful for
all participants in the U.S. cattle industry due to the outbreak of COVID-19
(coronavirus) in China and its resulting spread throughout the world. The
unknowns of this health crisis have resulted in extreme volatility in U.S.
cattle markets. The entire U.S. cattle and beef supply chain has been
impacted by COVID-19.
During late 2019 and early 2020, many forecasts were projecting higher U.S.
cattle prices during 2020 relative to 2019. A combination of many factors (a
plateauing U.S. cattle inventory, low corn prices, low U.S. unemployment,
strong domestic and export beef demand, new trade agreements, etc.)
supported the potential for higher U.S. cattle and beef prices. The
improvement in cattle prices was well documented by Chicago Mercantile
Exchange Live Cattle and Feeder Cattle Futures Contracts, USDA Agricultural
Marketing Service, CattleFax, and Livestock Market Information Center’s
(LMIC) price forecasts.
The U.S. Feeder Cattle Index Price is provided by the USDA’s Agricultural
Marketing Service and make up actual sales of feeder cattle via auctions,
direct trade, video sales, as well as internet sales within the 12-state
region of Colorado, Iowa, Kansas, Missouri, Montana, Nebraska, New Mexico,
North Dakota, Oklahoma, South Dakota, Texas, and Wyoming. These prices are a
computed 7-day weighted average price and provides a proxy for the current
U.S. feeder cattle cash market based on an 800-pound feeder steer. Figure 1
shows the substantial decline and recovery of the U.S. Feeder Cattle Index
Price from January 10th to August 18th.
The lowest U.S. Feeder Cattle Index Price occurred on April 14th.
On that date, feeder cattle prices for an 800-pound feeder steer had
declined by $33 per hundredweight or $264 per head from January 10th,
when the crisis began impacting U.S. Beef Exports. For a load of 60 head of
800-pound feeder steers, that amounts to a decline of $15,840 per truckload
unit. Since April 14th, U.S. Feeder Cattle Index Prices has
improved by $28 per hundredweight or $224 per head. For a load of 60 head of
800-pound feeder steers, that amounts to an improvement of $13,440 per
truckload unit. If evaluating the change from January 10th to
present (August 18th), feeder cattle prices for an 800-pound
feeder steer have declined $5 per hundredweight or $40 per head. For a load
of 60 head of 800-pound feeder steers, that amounts to a decline of $2,400
per truckload.
Looking back at 2020 thus far shows us just how volatile our cattle markets
can be. Producers have been faced with extreme levels of volatility and thus
risk in both cash and Feeder Cattle Futures prices. So, how volatile have
prices been? Cash feeder cattle prices have improved by $28/hundredweight
from April to mid-August. Just as a reminder this occurred during a
recession, with a highly indebted consumer, with the beef grilling season
nearing its end, as well as a health crisis that has no end in sight.
What would help Feeder Cattle Prices stabilize or improve?
As you can see, U.S. Beef Exports have declined significantly since the
pandemic started in March. When analyzing the data, there are year-over year
declines in beef export volumes to Japan (-20.7), South Korea (-39%), Hong
Kong (-11.2%), Taiwan (-37.2), Mexico (-61%), and Canada (-0.2%) for June
2020 compared to June 2019. It will be extremely important for export
volumes to improve over the next several months as U.S. beef production
increases during the third and fourth quarters.
Obviously, there are a number of major concerns given the current number of
business closings and the severity of unemployment so far in 2020. This will
likely make the consumer the driver of prices moving forward. For U.S.
cattle producers to see an improvement in feeder cattle prices in the short
run, there must be significant improvements in U.S. economic conditions and
consumer incomes. Additionally, where the product (beef) is sold is
extremely important. Restaurant re-openings and improvements in seating
capacity go a long way in helping to stabilize or improve prices. High-end
restaurants are particularly key in order for premiums to exist for
producers marketing beef cattle.
U.S. Economic Conditions
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I think it’s important for us to remember that when “flatten the curve” was implemented in March/April 2020 this was to slow the spread of COVID-19. It was not expected to stop or reduce the overall spread or number of people who will eventually get infected. The purpose was to avoid overwhelming medical resources until herd immunity, or a vaccine could be created. With that said, moving forward the same risks that were present this Spring still exist today.
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Risk. Anytime risk is high, we should expect consumer goods to increase in price and raw products to decline (assuming no significant changes in supply and demand). Why? Because everyone assumes more risk in the supply chain. Given, that 2020 has seen -$40/barrel crude oil, a health pandemic, extreme civil unrest in many cities, government mandates to shut down certain businesses, and a collapse in processing capacity in meat packing facilities, risk is at a level that many have never seen in our lifetimes. No one in the supply chain wants to assume more risk right now for the same returns they were receiving prior to the pandemic.
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On July 30, the U.S. Bureau of Economic Analysis officially confirmed that the U.S. Economy had entered into a recession. The official number for the second quarter growth rate for real gross domestic product (GDP) was – 32.9%. This comes after Real GDP decreased by 5% during the 1st quarter of 2020. Neither during Great Depression (1929–1933) nor the Great Recession (2008–2009) did such a decline in quarterly economic growth occur. The previous low-water market was a -10% slide during the 1st Quarter of 1958.
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Data from Opentable.com provides some insights on the declines in sales at food and drinking services. The site reports data on seated diners from online, phone, and walk-in reservations. While restaurant dining plummeted to a nearly 100% reduction in March and April compared to 2019, a steady recovery from those spring lows has occurred. Data thru August 18, 2020 shows a 55% reduction in diners year-to-date when compared to 2019. Additionally, new data from the U.S. Census Bureau indicates that food and drinking services saw year-to-date sales drop by 21.2% from 2019. This shows that while a recovery is occurring from the pandemic’s darkest days thus far, we are still nowhere near back to normal.
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Initial Unemployment Claims continue to increase each week at levels that can only be viewed by economists as disastrous. An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claim requests a determination of basic eligibility for the Unemployment Insurance program. Figure 3 below looks at U.S. weekly initial unemployment claims from September 2019 – August 2020.
A look back.
To have a better understanding of the magnitude of current initial
unemployment claims, at no point in time since the beginning of the
collection of this data set in January 1967 has initial unemployment claims
ever begun to approach the level of claims seen over the past 22 weeks.
Prior to 2020, the highest weekly unemployment claim was 695,000 from the
week of October 2, 1982. During “The Great Financial Crisis” (08/09
recession), initial unemployment claims peaked at 665,000 for the week of
March 28, 2009. Since the week of March 21, 2020 initial unemployment claims
have exceeded 1,000,000 claims 21 times, while totaling 57,403,000 initial
claims (in the last 22 weeks). While the stock market may have had a
V-shaped recovery from their lows in March, the data for the U.S. economy
sure hasn’t.
Bottom Line
COVID-19 has impacted every cattle operation in the United States. These
cattle market impacts have resulted in substantial economic losses for many
U.S. cattle producers. Many of these losses are ongoing and will likely
continue through 2020. Regardless, of when cattle producers market their
livestock during 2020, they will likely receive significantly lower prices.
Actual impacts will certainly vary widely across operations. Producers
should expect markets to continue to be volatile given our current set of
circumstances and many unknowns. Abrupt changes and big price swings in a
COVID-19 marketplace may become the norm. Cattle producers who continue to
search for ways to lower their unit cost of production (what it costs to
produce a pound of beef) and enhance the market prices they receive for
their cattle will be the in a better position when prices improve during the
next decade.