Expansion kicks into gear, but solid ranch profits remain
Prices for your calves will be lower this year. While that’s unwelcome news, to be sure, there are plenty of positives to glean from a calf market just 15 months removed from record-high prices.
“We’re at cyclically lower cattle prices, probably at least through 2018, and maybe through 2019,” says Jim Robb, Livestock Marketing Information Center agricultural economist, Denver, Colo. But as the environment shifts away from what calf producers experienced during the post-drought period of escalating prices in recent years, Robb says producers can expect a return to “more normal” seasonal price patterns.
Cattle prices hit a peak in November 2014, with 400 lb. to 500 lb. steers topping $316 per cwt, according to USDA Market News, or more than $1,400 per head for newly-weaned calves. Remarkably, the November 2014 price was more than 50% higher than in 2013.
Robb, however, calls that market an anomaly, and he and other livestock economists believe cattle producers should build their expectations going forward on the fundamentals of supply and demand, which continue to show positive signs for beef.
Normal seasonal patterns, if they play out in 2016, would represent a welcome relief from the extreme volatility markets displayed this past fall. Newly-weaned calves sold for roughly 25% less in November 2015 than they had a year earlier, about $1,035 per head. Much of that decline was tied to heavy losses by cattle feeders.
“Feedlots struggled throughout much of 2015, in large part because of the high prices they paid for feeder cattle,” says John Nalivka, president of Sterling Marketing, Vale, Ore. Weekly feedlot closeout calculations by Sterling Marketing suggest cattle feeders lost in excess of $500 per head on steers marketed in late 2015.
“The price of feeder steers accounted for 80% of the total cost of producing a fed steer last fall,” Nalivka says. “Two years ago, feeder steers only represented about 65% to 68% of the total cost. So, even with lower grain and feed prices, the cost of feeding a steer to finish weight increased significantly while the price of fed cattle was roughly 22% lower.”
Cattle feeders struggling with negative margins is a primary factor used in the outlook economists project for calf and feeder prices for 2016. Most cattle walked onto the truck headed to the packing plant this past year carrying a significant loss, and it’s only logical to expect feedyards will lower bids on feeder cattle as a result.
Poor feedyard margins suggest “demand for feeder cattle will decline, putting downward pressure on feeder cattle prices,” says Glynn Tonsor, Kansas State University livestock economist. He doesn’t see much relief in early 2016, either.
“It will be a particularly rough ride for cattle feeders during the first six months of 2016. The best month I’m projecting is closeouts in May 2016 with losses of $45 per head.” Tonsor says that’s well within the margin for error in calculated breakevens as there are no assumptions for risk management.
“However, the reason for that projected improvement is because there is not much change in the projected fed cattle price between November closeouts and May closeouts,” he said. The improvement in feedlot margins is from “the projected change in the cost of the feeder steer.”
National average prices for 750 lb. to 800 lb. feeder steers could drop below the five-year average late this year, according to Sterling Marketing.
Feedyards have struggled with losses for months, and some of their pain is self-inflicted. Marketings slowed this past fall as cattle were fed to heavier weights. In fact, average carcass weights reached a record 930 lb. for steers in mid-October, and the short-term glut of beef drove prices lower. Still, beef supplies were down a projected 3% this past year, but that is set to change.
“We should see 4% more cattle slaughtered this year, against 2015’s 5% drop,” Nalivka says. And those cattle will carry about 1% more weight to slaughter this year, which suggests an increase in beef production of about 4%. Nalivka says this year’s increase, coupled with the 3% decline in 2015 and a 6% decline in 2014, “doesn’t indicate burdensome beef supplies.”
Drought forced an extreme drop in heifer retention and a decline in cowherd numbers. Expansion signals beginning in 2014 show a sharp increase in heifer retention and a decline in cow slaughter, resulting in a larger cowherd.
Despite the woes of the cattle feeding industry, the outlook for cow-calf producers remains positive, at least through 2016. That assessment is based on calf supplies, as indicated from the from the U.S. cattle inventory and how it will expand over the next few years.
The historic U.S. drought cut the beef cowherd from nearly 32 million head in 2010 to 29 million at the beginning of 2014, the smallest cowherd since 1952. That triggered the price rally that peaked in the fall of 2014 and, coupled with abundant moisture, the subsequent expansion phase.
By January 2015, cattlemen had added 600,000 cows to America’s herd, totaling 29.7 million head. The July 2015 mid-year inventory report revealed aggressive expansion continuing with a 7% increase in replacement heifers.
“Going forward into 2016,” Tonsor says, “I anticipate the calf crop will slowly begin to expand such that the tight supply aspect of the past several years lessens.”
Nalivka projects USDA’s cattle report—to be released later this month—to reveal a 2.5% to 3% increase in total inventory and a 2% increase in the nation’s cowherd. He expects 2017 will produce another 2% increase in the beef cow inventory.
While the expansion phase of the cattle cycle means peak prices are a distant memory, Nalivka says there are positive lingering effects of the liquidation phase.
“We have a younger, more efficient cowherd today,” he says. “We have a better cowherd from both an age and a genetics perspective.”
Even the best calves, however, will put fewer dollars in your pocket this year. Yet, Nalivka projects 2016 cow-calf profits to average $295 per cow. That would represent a 40% decline from the average profits of $495 per cow in 2015, but still the third highest annual per cow profit in the Sterling Marketing database.
Despite his projections for lower calf and yearling prices, Nalivka encourages producers to monitor prices and their budgets.
“Prices can drop quickly, and feedlots are already losing money,” Nalivka says. “Feedlot margins only increase from lower feeder cattle prices, so they’ll try to bring those prices down.”
The best insurance against volatile prices in the year ahead, he says, is for producers to earn their premiums with “good quality cows, a good marketing plan and managing their costs.”
After the drought-forced herd liquidation pushed U.S. cattle inventories to 60-year lows, long-term expansion in the cattle sector is expected to add more than 3 million head by 2017.