November 29, 2021

Commodity Insight: Cattle prices headed much higher

In recent days, crude oil prices rallied to their best levels in seven years. Oat prices hit an all-time high of $6.36 a bushel. Wheat supplies have tightened to levels that generally forecast much higher prices. Cotton prices, thanks to Chinese buying, hit a record high this week of $1.16.

Natural gas prices, fertilizer, are now hugging an eight-year high. And the major commodity indexes are kissing a six-year high with one index at a new all-time high.

No doubt, inflation is bubbling up in the U.S. economy and across the globe. And last week in this newspaper column I stated that the supercycle for commodities that has been underway for the past year seems to have the legs to run further.

I stated specifically: “For the past year I have been convinced we are in the midst of a commodity supercycle. The reason is simple. From last September virtually every commodity has improved dramatically in value. … But after the past few weeks I am now convinced that the United States and the world are in the early stages of a commodity supercycle that will run another 10 years.”

A market that appears destined for much higher prices now that a host of other commodity markets are heading north is cattle. Cattle prices have been defensive over the past few years for a variety of reasons. The dry conditions across the West have pushed cow slaughter to levels not seen since 2011.

In addition, heifer slaughter is topping a year-ago levels, which suggests cattle producers are in no mood to increase the size of their herds. One of my favorite research groups argues that it will be at least three more years before the U.S. cattle herd increases at all.

From a supply standpoint, there is no doubt that supplies of market-ready cattle are growing tight. How tight remains to be seen, but from a sheer supply viewpoint, a case can be made that cattle prices are headed north and in a big way.

But what about demand for beef, you ask?

Over the past decade, a key ingredient for boosting the U.S. ag markets of all kinds is demand from China. From the Wall Street Journal, dated Dec. 14, 2011, 10 years ago, with a title of “As China Goes, So Go Commodities” and written by Liam Pleven: “You want to know where the global commodities markets are heading in the coming years? Then it’s probably best that you remember a single word: China.”

From Beef Magazine, September 2020, by Jeff Bloom: “My prediction: China will become the largest buyer of U.S. beef in the next five years.”

From FarmWeek by Daniel Grant in September 2021: “U.S. beef sales to China increased more than 1,000% in volume and value ($622.5 million) in the first half of the year. And the market shows no signs of slowing, according to Don Close, senior vice president of RaboResearch and Animal Protein.”

“It’s been an incredible story,” Close told FarmWeek. “If you look at the strength in cattle and beef prices globally, it all points back to just how much beef demand in China is driving the market.

“Given the circumstances of changing eating habits and changing taste preferences in China, and their inability to substantially increase their own cattle and beef production, (the Chinese) will be a major import player on the beef side for quite some time.”

In a chapter entitled “A Bottom In Cattle?” from “Haunted By Markets,” I wrote on Dec. 14, 1998: “The odds are exceptionally high that cattle prices have bottomed. Finally and at long last! My work suggests that they did so on Friday, December 11, when February futures fell to $57.35 and traded below the nearby December contract and under cash prices, as well. It was a wild day!”

Not once after I penned the column above did nearby cattle futures trade under $57.35. And in October 2014, cattle futures rose to a new all-time high of $171.98.

I am as bullish on the cattle market today as I was back in late ‘98. I can envision cattle prices, cash and futures north of $155 to $160.

Keep in mind, however, that back in 2014 the world was not caught up in a commodity supercycle as it is today. And if the supercycle runs another 10 years, as I suspect, I may not be as bullish as I should be.

But those dealing with real cattle and not the cattle market should always remember the wise words of Will Rogers: “Never kick a cow chip on a hot day.”

Here are a few other wise words to live by, as well: “Take the bull by the horns.” “Party until the cows come home.” “Don’t cry over spilled milk.” “To laugh is human, but to moo is bovine.”

Keep all that in mind — especially when walking in a field full of cattle on a hot and humid day.