Drought is sowing the fundamental seeds of an extended seller's market for cow-calf producers, albeit a market that may receive extra short-term pressure. Specifically, while cyclical cowherd expansion continues, there is growing evidence that drought will stall even modest growth this year.
When cow slaughter increased this spring—counter to the notions of cyclical cowherd expansion—some could dismiss it as producers replacing cows that had already been kept a couple of years beyond normal plans. That as opposed to some net herd liquidation.
When cattle placements in feedlots hit record levels in the late winter and early spring, it was logical to assume this reflected inventory timing rather than adjustment to the inventory itself—calves that would normally have been stockered through the winter had to go to the feedlot earlier because of a lack of fall and winter forage.
Feedlot placements in early spring seemed to confirm these theories. Cattle placements for April were down two percent and placements in May plummeted 14 percent compared to a year earlier. In other words, popular theory had it that expansion was continuing as expected despite lingering and growing drought conditions.
Then came the June placement number announced by USDA a couple of weeks ago: up 10 percent! It defied expectations, although analysts for the Agricultural Marketing Service pointed out, “Maybe the placement total should not have been such a shock as we recall a handsome June feeder market, extremely dry conditions, and June nationwide reported auction totals that were 19 percent higher than last year. Feedlot placements weighing under 700 lbs. dominated the data and were more than 30 percent over last year, while weights over 700 lbs. were five percent less than a year ago.”
Spun differently, when the July Cattle on Feed Report was issued, folks at the Livestock Marketing Information Center (LMIC), explained, “Clearly, in recent months drought has bolstered feedlot placements…Some of the year-to-year increase in monthly on-feed numbers has been the result of continued structural change in the U.S. cattle-feeding sector. That is, essentially all the increase in the number of cattle on-feed (about 500,000 head) occurred in the larger feedlots and not in the less than 1,000 head capacity feedlots, which are not included in the monthly report. Nationwide USDA reported that the number of cattle on-feed was 4.1 percent above 2005's as of July 1.”
Perhaps more telling, though, was USDA's mid-year cattle inventory report in July. According to LMIC, “The report confirmed that drought conditions across much of the U.S. prompted a slowdown in the rate of increase of the cowherd…The number of heifers 500 lbs. and over held for beef replacements which totaled 5 million head, unchanged from the prior year and lower than the average industry expectation.”
For the record, the total number of beef and dairy cows July 1 was modestly above 2005's. “All cattle and calves in the U.S. totaled 105.7 million head, 1.2 million head (or 1.1 percent) above a year ago and 2.2 percent over 2004's,” say LMIC analysts. “The number of beef cows was reported at 33.9 million head, up less than half a percent from last year while the number of dairy cows at 9.2 million head was 1.1 percent larger…The USDA estimated the 2006 U.S. calf crop at slightly above 2005's, however the year-to-year increase was smaller than expected given the larger cowherd on January 1 of this year. USDA reported the calf crop at 3.79 million head, 0.3 percent or 120,000 more than 2005's.”
All of this is to say that cow numbers appear to be growing slower than many predicted. In June, Derrell Peel, a livestock economist at Oklahoma State University reminded folks, “In the absence of infinite supply of feeder cattle there must be a limit to the ability to continually increase feedlot placements. The recent rally in fed prices and strength in feeder markets indicated that the market was beginning to realize that feeder supplies would be fairly tight in the second half of the year. This latest report (June) should remove any remaining doubts that the feedlot situation so far this year has been more a matter of changes in the timing of feedlot production than a huge annual increase.”
July's Cattle on Feed and Cattle Inventory report underscores Peel's viewpoint.
So, fundamentally, the slowed inventory growth should allow historically high calf prices to remain so longer than they otherwise would have through this stage of the cattle cycle.
That's the good news.
Increased Supplies Could Pressure This Fall
Though the bottom is certainly not shaping up to fall out of the calf market this fall, these same conditions also set the table for more than expected beef production through the fall and into early next year, which will pressure fed cattle prices.
Beef demand, though strong, has lost steam. Corn prices—though still relatively cheap—and high energy costs will likely increase cattle feeding breakevens heading into next year.
As for Japan, yes, cattle futures jumped the day before the official announcement July 27 that the Japanese borders were once again open to U.S. beef. It was the kind of psychological excuse this market rallies and dives on during a trading session. By the next morning, though, futures were back down and traders were awaiting the cash trade based on market fundamentals.
Bottom line, having the market open is obviously positive, but the true fundamental impact of it will take months and years to evolve. Market access there is still limited to only beef from cattle younger than 21 months old. Some Japanese purveyors that used to handle U.S. beef have said they won't pick it up again. If Japanese consumer surveys are to be believed, there is little pent-up demand for the U.S. product. And, talks with South Korea continue to be in a stalemate.
Besides which, only a fool would bet against BSE and related issues disrupting markets again and again. Just consider the last month:
• Canada discovered its sixth and seventh cases of BSE; the latter a 50-month old female born after the feeding ban went into place. USDA was finalizing the paperwork to resume allowing imports of Canadian cattle over 30 months of age. Unconfirmed reports July 28 had USDA withdrawing the rule that would have made such imports possible.
• A beef roast reportedly found its way into an order of turkey and pork that was shipped to Japan.
• Creekstone Farms has asked for a summary judgment in its suit against USDA. As you'll recall, Creekstone wants to test its beef for BSE; USDA has refused.
• Russia is demanding to audit U.S. pork and beef freezing practices.
Add it all up and feedlot buyers are likely to be grumpier than toothless rattlesnakes when it comes to buying calves this fall.