While fundamentals continue to drive the cattle market, increasing prevalence of external factors can play havoc day-to-day.
Based on placements the past six months, Brad Kooima of Kooima Kooima Varilek believes the tightest supply of this entire cattle cycle will occur in the next 60 to 90 days. It wouldn’t be the first-time the market makes a high in February or March.
“Now beyond that, I don’t see there’s a tremendous chance to have an oversupply of cattle going into the summer,” he adds. “However, you’ve got things like the Mexican border that are coming into play. So, I’m trying to react to what I see, but the fundamentals aren’t going to change.”
Here are seven other takeaways from Kooima’s recent conversation with Chip Flory on AgriTalk:
1. Fundamentals Still Drive The Cattle Market.
“I wish we could just talk about cattle fundamentals,” he says. “I’m still an old-school fundamentalist who believes a lot in trying to figure out where we’re at with supply and how we’re getting along with the boxes and beef demand.”
Rumors and misguided comments, such as the New World screwworm (NWS) scare a week ago and geopolitical factors this past Tuesday, can cause the markets to react.
“Now, is it only supply? Of course not,” Kooima says, regarding what drives the markets. “But if I had to start there, barring more of this outside, new stuff we’ve been inundated with, I think the market still generally driving the deal. We don’t have enough cattle, and that’s why they’re cutting kill. That’s why they’re closing plants. There’s not enough to go around.”
2. Heifer Retention Exists But Isn’t a Major Market Factor.
Kooima says heifer retention has started but is insufficient to significantly change the supply trajectory.
“It’s not like 2015 when we flipped a switch and the whole world decided to save them at one time, but it’s there,” he says.
He’s predicting a 1% to 2% increase, saying the retention is regional — referring to the Dakotas, Montana and Colorado.
“What’s driving it is economics,” Kooima says. Some ranchers can’t afford to not sell their heifer calves, while other factors include the age of the rancher, no desire to deal with first-calf heifers and drought.
When asked if there is enough heifer retention to move the needle to bring some relief on the supply side, Kooima responds: “The short answer would be no. We’re never going to have a cow herd like we had 10 years ago. We’re going to have to figure out how to do with less.”
He says the strategy to increase supply is feeding to heavier weights and the growth in beef-on-dairy.
“The gorilla in the room, to me, is beef-on-dairy,” he says. “From a couple of standpoints, just from a raw supply standpoint, the dairy cow herd’s the biggest since 1993. It’s grown and grown, and why wouldn’t you if you can get $1,200 to $1,500 for a day-old calf?”
3. Mexico Has Built Feeding and Processing Infrastructure in Response to Border Closure.
Kooima says with the U.S.-Mexico border closed due to NWS, Mexico has figured out how to finish and process cattle.
“I think there’s a lot of people there who don’t want anything to happen,” he says, regarding reopening the border. “They’re benefiting from this great big bull market and now they’re selling the beef to us. So, it may never exactly be the way it was again. They waited too long on this matter, in my opinion. It’s not a market factor.”
4. Beef-on-Dairy and Vertical Integration Are Rising Concerns.
Kooima shares his concern about the long-term implications of vertical integration and the consequences of the growing beef-on-dairy supply.
“For the first time, you got an integrator that has the ability to control that thing from its birthday and schedule it out 341 days later to slaughter,” he explains. “A dream that the packers chase. I watched them wreck the hog market. I see what happened in poultry. This scares me to death. The combination of all of that is we’re losing price discovery. They’re going to try to slow it down as much as they can until they can control the supply.”
5. Packers Are Adapting to the Market.
Kooima says the closing of Tyson’s Lexington plant and shift reduction at its Amarillo plant are examples of the broad industry trend to reduce harvest rates and shutter facilities when supplies tighten. He explains the closing will result in even less negotiated trade. The Lexington plant primarily did formula (non-negotiated) pricing, and he predicts those formula customers will now go to Tyson’s Dakota City plant.
“Dakota City, a plant that’s closest to me, 64 miles away, is likely going to become a formula plant. It’s going to further deteriorate price discovery up in this neck of the woods,” he stresses.
He adds packers are also using tight supplies as an opportunity to perform necessary cooler clean-out cycles and reduce the number of harvest days per week.
“They’re systematically reducing kill to try to gain some leverage back,” Kooima says.
When it comes to regional packers, he hopes they can survive: “I think they’re critical to price discovery.”
6. Demand for Beef Remains Strong.
Kooima is bullish about beef demand, especially amid supply tightness.
“When people say demand is pretty good, I go ‘No, it is phenomenal,’” he says. “The demand for grind is crazy. We have to make sure we can continue to fuel that rocket.”
7. Risk Management is Essential Amid Market Uncertainty.
On protecting against risk, Kooima advises: “My mantra is and has been for a year and a half to buy some puts. You’re going to have to buy puts to keep you in business. Let’s not let 2015 happen to us again.”
He goes on to add: “Do I think that there’s a high-risk point here in the short term? No, obviously, I just said I think we’ve got the tightest numbers ever, but there’s always something that can go wrong, so be careful.”
Listen to Kooima’s and Flory’s AgriTalk conversation here:
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