News Update

January 21, 2012

Happy New Year to you and your family. I have no excuse for not updating my column other than I have not done it. We have been very busy buying and selling real estate in 2011 and 2012 has started off very well. There is a tremendous amount of speculative movement in commercial real estate around Miles City as well as residential rental type property. Most of this is fueled by the prospects of oil and gas development in this area. Time will tell if this area will see the development that some hope for and many worry about.

If you have questions regarding farm and ranch, commercial or residential property, call 234-1523 or email me, monty@leshandcompany.com

The cattle market is at record price levels for all of 2011 and the start of 2012. Live cattle are $30/cwt over the 5 year average, moving in $2-6/cwt swings almost weekly. Live cattle should remain in the $120-140 range over most of 2012. The live market needs to be at or above these levels to have positive returns to feedlots.

Feeder cattle at record levels will likely fluctuate over the year but put in a record average price level. Reduced supplies and steady demand are pushing cash prices higher weekly.

Calves will likely set a record price level in 2012 as supplies are reduced once again by lower cow numbers. I do not look for cow numbers to begin to increase for 2-3 years, which means that the calf market will stay strong.

What can cause the cattle market to decline from these price levels? In my opinion there are only a couple of possible reasons that could cause a decline.

1. A stronger dollar causing reduced exports and increased imports. I feel that this is the most likely reason for a price decline in the short term for the cattle market. Outside financial markets are uncertain and volatile. A flight to quality could cause the dollar to rally.

2. Consumers reduce consumption of beef because of higher retail prices. The economy is weak, but starting to improve. Retail beef must continue to move higher to support the cash market. Strapped consumers will change eating habits if their pocketbook can not afford as much beef.

3. Reduced capacity of feedlots and processors. In the long run this will be the reason cattle prices decline. This segement of the industry is currently under a lot of profit pressure. The response will be to reduce the size of the feeding capacity as well as processing plants to remove the excess capacity that is currently bidding up the cash cattle market. Simple economics will dictate that the highest cost operators be closed, thus reducing capacity to the level of equilibrium required to achieve profitable operations.

In the long run this is not a positive outcome for cattle producers for 2 reasons. Cattle inventories will be permanently reduced as lower cost cattle operations in other countries will replace USA production. Market power will shift to the processing sector and be very difficult to regain unless supplies are reduced again. Over a long period of time the industry will self liquidate as capital and operating costs exceed the return on investment.

The production side of the business today is experiencing record cash prices, but probably not record profits as costs have exploded in all areas. The one area that is cheap is borrowed capital, which the beef industry is a heavy user of. Higher interest rates will have an immediate impact on cattle producers, feedlots and processors.

Let’s enjoy the ride while it lasts, but get your business lean and mean to survive the next downturn in commodity prices.

Monty.