What Ranchers Can Expect in the Cattle Markets for the Rest of 2016

July 1, 2016 05:00 AM

Ranchers, no longer riding the crest of a supply-starved market, cinched up early this year for the inevitable ride lower. Few, however, expected the steep price decline for all classes of cattle and the volatility that has seeped out of the trading pits in Chicago.

As with all markets, however, changes present opportunities. Nowhere is that more evident than in the cattle feeding industry. On average, feedyards lost money on every animal they shipped in 2015, and last fall those losses grew to historic proportions. The Sterling Beef Profit Tracker calculated average cash losses of nearly $700 per head for the week ending Dec. 19, 2015, with cumulative industry losses last year estimated at $3.2 billion.

“Most of those losses were driven by the historic high prices paid for feeder cattle,” says Sterling Marketing President John Nalivka. “Feeder cattle typically represent 73% to 78% of the cost of finishing a steer. At many points last year, feeder cattle prices amounted to more than 80% of the cost of finishing a steer.”

Feeder cattle prices were unsustainable at those levels because feedyards couldn’t continue to lose such enormous amounts of money. The result has been a lower trend for both calves and yearling prices since January. By May, feedyards were showing profits for the first time in 15 months.

The retreat in feeder cattle prices has done more than just help feedyards recover a little lost equity. The softer market has also had an impact on female prices and herd expansion, according to Nalivka.

“We’ve seen rapid herd rebuilding for the past two years as cow and heifer slaughter were both down sharply,” Nalivka says. “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 then was down another 12% in 2015.”

All of which led to an increase in cattle supplies and beef production in 2016. Coupled with increasing beef supplies, pork and poultry production are both on pace for 4%-plus growth. 

“Per capita supplies of red meat and poultry will be 6% above the 2014 low,” Nalivka says. “Prices have fallen sharply, and it appears that ranchers are already adjusting to both lower prices and a larger number of older cows in their herd, which is the result of sharp reductions in culling over the previous two years.”

Those adjustments are evident in the increase in beef cow slaughter year-to-date. Through the first week of June, cow slaughter was 6% higher than the same period in 2015, and dairy cow slaughter during the same period was down 1%, leaving total cow slaughter up 2% year-to-date.

“Cow slaughter the first five months of this year has already equaled my forecast for the entire year,” Nalivka says. “Cow slaughter will likely continue to increase into the second half of the year, posting a 3% increase from a year earlier through September.  That pace will continue into the fourth quarter, leaving cow slaughter for the year up 3%.”  

More cows headed to slaughter means more beef in the channels, and likely lower prices. That will spill over into the calf and yearling markets, too. Nalivka has lowered his price projections for those classes this fall. He expects 550-600 lbs. steer calves in Oklahoma City to fetch around $157 per cwt., a 24% decline from 2015. Yearling steers weighing 750-800 lbs. are projected at about $134 per cwt., a 30% decline.

A wildcard was thrown into cattle markets--and all markets--with the Brexit vote on June 23. More uncertainty and volatility will be evident until the markets rebalance and adjust. Since the vote, the dollar has strengthened 2%, and the British pound has dropped to the lowest level since 1985.

“A strong dollar equals higher costs for U.S. exports,” Nalivka says. “The impact of Brexit for beef and pork will be the direction of the dollar and its impact on U.S. meat and poultry trade outside Britain and the EU. With regard to costs of production, a stronger dollar implies less grain exported and a lower cost of feed for livestock production.”

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Spell Check

Indiana Jim
Goshen, IN
10/6/2016 07:50 AM

  Took two nice dairy steers alittle over 1500 lbs each and a butcher cow to what would be considered a regional auction here in northern Indiana yesterday. The check was about a thousand less than I expected on those 3. .77 cents for 26ac75the very nice steers and .41 cents for an ok brown swiss butcher cow. These prices have been falling for over a year now. Think we are on the brink of more than a cyclical downturn in farming connected to more than the farm economy and traditional supply and demand forces. Get conservative now! I started farming with dad in the late 70's survived the 80's well because of frugality.


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