Expect Cattle Adjustments

November 11, 2015 02:53 AM

Price strength ahead despite recent dip

In the span of 14 months, America’s cattle producers saw two of the most extreme market moves in history. For top operators, the market swings represented more than $600 per animal—from $300-per-head profits in 2014 to $350-per-head losses this year. 

“Fundamentally, there was a market imbalance,” says John Nalivka, president of Sterling Marketing. “Last year’s rally may have been overdone, but this year’s collapse was overblown.”

This past year’s rapid price rally resulted from a perfect storm: the smallest cow herd in six decades, increasing beef exports, tighter supplies of pork and poultry, declining grain prices and improving consumer beef demand. Some of the same variables that created the rally were complicit this year in creating one of the worst market breaks ever.

Cow-Calf Returns Still Historically Strong
Strong net returns will continue in 2016 after 2014’s record highs. 

“Feed and energy prices began falling last year, which helped drive up the price of calves and feeder cattle,” Nalivka says. “That produced record-high feedlot breakevens, which has been a disaster for cattle feeders the past few months.”

Storm Shifts. Meanwhile, some of the variables that created last year’s perfect storm began to shift. Pork and poultry production increased significantly. Pork production is expected to rise 7% in 2015, with poultry production increasing about 5%. More pork and poultry at retail eased prices and made those protein sources attractive alternatives to beef. Continued price increases at retail compounded the problem for beef; July saw a record $6.14 per pound.

Suddenly, beef demand began to erode, making retailers cautious buyers. Predictably, wholesale beef prices declined precipitously. The Choice cutout price declined 20% in fewer than six weeks, spurred on by a collapse in cattle futures. Cash fed-cattle prices fell below $120 per cwt for the first time in two years and traded $42 per cwt lower than at the same time this past year. That represents a 25% decline.

“Feeders compounded their misery by holding cattle on feed to heavier weights,” Nalivka says. “That created a backlog of fed cattle in certain regions of the country and increased carcass weights by an average of 30 lb. compared to last year.”

Recovery Begins. The solution to high breakevens and excessive feedyard losses, Nalivka says, is lower feeder cattle prices. 

“There’s plenty of economic motivation for cattle feeders to lower their bids on feeder cattle,” he says. “We’ve already seen the feeder cattle and calf market dip 20%, but that’s an overreaction to the volatility we saw in September.”

There are some encouraging signs the cattle markets might already have turned the corner, says Derrell Peel, Extension economist at Oklahoma State University.

Feedlots and packers had reason to “offset the lack of cattle numbers with additional carcass weight,” Peel points out. “However, there are both biological and market limits to how far weights can be pushed before hitting a relatively abrupt wall.”

Mid-October saw a rally in both the cash and futures markets. Observers see it as an encouraging signal from feedyards and packers. 

Cow-Calf Gains. That’s positive news for cow-calf producers. The fall correction came just before many planned to sell calves for significantly diminished annual income. The saving grace is that 2015 calf prices, though down 18% to 20% from 2014, remain relatively good.

What Does It Mean To Me?
  • Calf and feeder cattle values will fall in 2016 as market dynamics shift.
  • Feedlots will rebuild after price collapse by moving heavy cattle to market.
  • Cow-calf operations are still enjoying healthy margins.

This past year’s calf prices were 2.5 times higher than in the fall of 2008, Nalivka notes. That suggests ranchers still control good profit margins with their calves. Nalivka calculates that in 2014, ranchers earned an average profit per cow of $526. This year, he expects per-cow profits of $490, with a decline next year to an average profit of $277 per cow. “Prices will weaken further into 2016 in response to increased beef production, which I expect to be up 3%, as well as our forecast of pork production that will likely match or exceed this year’s record and 4% to 5% more chicken,” Nalivka says. 

“Calf prices are likely to decline 15% to 18% in 2016, and feeder cattle will come under greater pressure from feedlots increasingly motivated to erase the red ink on closeouts. Consequently, an 18% to 20% drop in feeder cattle prices is likely,” he adds.

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