Cattle Market Silver Lining: Stability

January 7, 2017 02:25 AM
 
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The worst of the equity drain is likely over, leaving opportunity for good managers

Silver linings are hard to find in a cattle market just two years removed from record-high prices—but they exist. Even as ranchers shipped semi loads of calves to market this past fall valued at $70,000 less than the same trailer loads in 2014, economists believe the worst of the equity drain is over.

CattleFax CEO Randy Blach says positive feedyard margins—which began to appear on closeouts in December—will benefit ranchers and others in the supply chain. 

“Cow-calf and stocker operators need to see the cattle feeder get profitable,” Blach told attendees at the Kansas Livestock Association convention in Wichita. “He gets profitable and you’ll start to see some stability come back into your business.”

That would be welcome news as calf prices tumbled 52% from the peak in December of 2014 to December 2016 (see chart below).

Windfall profits from a supply-starved market in 2014 were quickly erased by a combination of factors.

“Profits plus grass equals expansion,” says John Nalivka, president of Sterling Marketing Inc., Vale, Ore. “We saw rapid herd rebuilding for two years as both cow and heifer slaughter were down sharply. Beef cow slaughter was down 14% in 2014 followed by a 4% drop in 2015. And while sharply reducing herd culling in order to take advantage of higher prices, cattlemen also bred more heifers. Heifer slaughter fell 8% in 2014 and was down another 12% in 2015.”

An increase in the supply of beef, however, was just part of the reason cattle prices plummeted. The erosion in 2015 and 2016 prices is a result of increasing beef tonnage and larger red meat and poultry supplies. USDA’s National Agricultural Statistics Service reports 5.8% more beef in 2016 and projects another 4.4% increase this year. Per capita supplies of total red meat and poultry rose 7% in 2016, Nalivka adds, with an additional 8% expected this year.

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Similar numbers are projected by the Livestock Marketing Information Project, Denver, Colo., calling for increases in beef and pork supplies every quarter of 2017 and 2018. That’s enough to provide 218 lb. of red meat and poultry on a per capita basis by 2018, an increase of 16 lb. per person from 2014, USDA projects.

USDA’s December 2016 World Agricultural Supply and Demand Estimates Report projected 2017 beef production would reach 26 billion pounds, up 800 million pounds from 2016 and the largest since 2011.

CattleFax estimates 2017 fed cattle harvest will increase 800,000 to 900,000 head compared with 2016, and Blach encourages producers to help reduce the tonnage on the market.

“One of the best ways to combat these increasing numbers is to get weights under control,” Blach says. 

Still, increasing supplies of cattle means the market outlook is softer for 2017. USDA projects the average midpoint fed steer price at $107 per cwt, which is more than 10% lower than 2016. Sterling Marketing forecasts fed cattle prices in the third and fourth quarter of 2017 will fall to $95 and $96 per cwt, respectively, with an annual average of $100. If accurate, that would represent a $48 per cwt decline in the annual average from 2015.

For calf producers, the prospects for 2017 are also lower, according to Sterling Marketing forecasts.

“I project another 14% to 16% decline in the price for feeder cattle and calves for 2017,” Nalivka says. “I project a third quarter price of $118 per cwt for Oklahoma City yearling feeders and $136 per cwt for calves.”

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Lower prices are never welcome, but they should help retailers sell more beef. The average price of retail Choice beef was $5.76 per pound in November, 45¢ lower than the same month in 2015. The trend of lower retail beef prices should continue this year, helping draw consumer interest. 

Economists suggest cow-calf and stocker producers search out new opportunities due to lower calf and feeder prices. 

“Retained ownership may be attractive for cow-calf producers depending on calf weaning weights and management flexibility,” says Derrell Peel, Oklahoma State University Extension economist. He believes the price rollback on calves this past fall might suggest additional opportunities for the stocker segment.

Nalivka agrees, saying, “If you already have the forage, backgrounding can be an appealing option.” 

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