HUNTIN' DAYLIGHT -- CHOICE REBOUND

by: Wes Ishmael

“The breeding herd (beef) is not likely to begin expansion until the drought in the Southern Plains fades,” says Chris Hurt, an extension agricultural economist at Purdue University. “If crop yields return to normal in 2012, prices for major feedstuffs and forages will be lower, and finished cattle prices will be very high. This is a combination that can add quickly to calf prices by the fall of 2012. The start of heifer retention in late 2012 would reduce beef supplies even more and be the foundation for even higher cattle prices in 2013.”

Hurt says low beef production likely would keep calf prices high through at least 2015.

“If Mother Nature cooperates in 2012, on a per cow basis, cow-calf operations will post their highest nominal return over cash production costs ever,” explained analysts with the Livestock Marketing Information Center (LMIC) at the end of October. “Looking ahead, estimated cow-calf returns in 2012 should at least match 2005's record (about $150 per cow). Preliminary forecasts for 2013 suggest returns will set a new record high (exceeding $160 per cow), because the uptrend in calf and cull animal sale prices are forecasted to out-pace production cost increases.”

This year, LMIC pegs returns in areas unaffected by the drought at $90 per cow. LMIC has estimated annual cow-calf returns (basis a Southern Plains operation) since the early 1970s.

Even with the higher estimated returns going forward, the folks at LMIC explain, “In the Midwest and some areas of the U.S. not impacted by drought this year, those returns may not be large enough to preclude mixed farming and cow operations from reducing their herds. Those declines will be the result of record high grain prices. Cow-calf operations that cannot switch their pastures to crops or other uses (hunting, etc.) will have economic incentives to increase their cowherds…Overall, the U.S. beef cowherd will be below a year ago as of January 1, 2012.”

Supply AND Demand Pushing Cattle Prices

“Three factors are driving the bullish cattle market: the anticipation of very limited 2012 domestic beef supplies; foreign buyers of U.S. beef who are willing to pay the high prices; and a more optimistic tone for the world economy,” says Hurt.

Per capita availability of beef in 2012 will decline to 54.3 lbs. according to USDA estimates. That's a 17 percent reduction since 2007 when high corn prices (and drought more recently) sent the beef industry into a liquidation tailspin, Hurt explains.

“Foreign markets are buying a record amount of beef at record high prices. USDA now expects a record 2.7 billion lbs. of beef to be exported this year, representing a record 10 percent of domestic production,” Hurt says.

Moreover, Hurt says 11 percent of domestic beef production is expected to flow to international customers in 2012. For perspective, five percent of production was exported in 2007 when the U.S. was still in the grips of lost exports due to BSE.

As for the overall economy, Hurt says although European concerns remain, markets have reduced the odds of a doomsday outlook.

Finished cattle prices are expected to trade in the low $120s for the rest of this year and increase modestly in the winter, says Hurt. He adds that the 2012 spring price rally is expected to increase prices to the higher $120s for March, April and May, with summer prices cooling to the mid-$120s. All told, he says record annual prices are expected for 2012, averaging in the low to mid-$120s, compared to the previous record, which will be set this year near $115.

“Even though we have had higher feeding costs in 2011, the fed cattle price per pound has still exceeded the cost per pound of gain,” says Dillon Feuz, agricultural economist at Utah State University in an October In the Cattle Markets. He was explaining why, even with higher costs, carcass weights continue to ratchet up to record and near record levels. He points out the 5-area fed steer carcass weights exceeded 900 lbs. that week.

Feuz explained increasing carcass weights in recent weeks also were a byproduct of the widening Choice-Select spread.

Choice Grade Sizzles

“Since August the Choice-Select spread has been steadily increasing. This past week (mid-October) it exceeded $18/cwt. That is also near record high,” Feuz says. “…Once a feeder has cattle on feed, the genetics are set, so that won't impact the percentage grading Choice. There really are only two main management tools to increase the percentage of cattle grading Choice and they are related: 1) be less aggressive with implants and 2) feed the cattle longer. Typically, if you are less aggressive with implants, you are also going to feed the cattle longer. However, you may lose as much in feed efficiency in this scenario as you gain in a higher price by selling more Choice grading cattle. Alternatively, you can continue the same implant strategy and still feed the cattle longer, and therefore have heavier cattle to sell.”

After languishing in the single digits through the Great Recession and recovery, the Choice-Select spread began ratcheting up in August. It averaged $18.49 the week ending November 11.

“The Choice/Select spread typically widens at the end of the year, but the increase has been larger and earlier than usual this fall,” says Derrell Peel, livestock marketing specialist at Oklahoma State University.

Peel notes that the weekly average Choice-Select spread during the third week of October was the highest since December in 2006 and 2007.

“…a decrease in Choice supply, a decrease in Select demand or an increase in Select supply could all cause the Choice/Select spread to widen,” Peek says. “It is not always easy to understand what is driving changes in the Choice/Select spread because of the many factors that may be involved.”

As for the recent run-up in prices, Peel explains the Choice grading percentage in 2011 has remained mostly even with year-ago levels; total beef production is declining; and cow slaughter is currently a higher percentage of total slaughter compared to last year, indicating that the decrease in fed beef is even more pronounced than the total would imply.

“For the past several years, a growing Choice grading percentage has contributed to a generally narrow Choice/Select spread,” Peel says. “These factors all combine to result in lower total beef supplies and proportionately lower Choice supply compared to Select beef supply. More impacts are expected in the coming months.”

The drought forced many younger, smaller cattle into feedlots, which is likely to temper carcass weights and may continue to limit Choice grading percent, Peel says. He adds that high feed costs and lack of feedlot profitability is a growing incentive to minimize days on feed, which is likely to further limit Choice grading percentage.

According to Peel, wholesale beef values indicate some strength in middle meat demand. Prices for Tenderloin and Ribeye products have risen above year-ago levels in recent weeks, while prices for Chuck and Round products continue well above last year's levels.

However, Peel believes the forthcoming decreases in total beef production, especially for Choice beef supply, will continue to push wholesale and retail beef prices higher and provide a critical test of demand.

“It is unclear just how high beef prices can rise before demand will be choked off,” Peel says. “Clearly, the foreign component of demand in terms of beef exports has been critical for the past 24 months.” He expects strong export demand to continue, although he believes it unlikely that the 20-30 percent increases of this year can be maintained.

In the meantime, Walmart, the nation's largest food retailer says it will add Choice grade beef in all of its stores.

“There has been much talk over the last month about Wal-Mart's decision to offer Choice beef products in all 3,800 of its stores, which previously only carried Select,” explained analysts with the Agricultural Marketing Service (AMS) November 11. “This has helped widen the Choice-Select spread and should prompt feedlots into altering their programs to produce more high quality carcasses; perhaps more days on feed, more predominantly English feeder cattle, and less use of growth promoters and high performance feed additives.”

If Walmart follows through, there will be fallout, whether or not they stick to Choice for the long haul.

“With increased usage of Choice product by Walmart, the Choice-Select spread has widened, and this could well continue until we see increasing supplies of Choice beef in the mix, normally in the March/April period,” says Emmit Rawls, agricultural economist emeritus at the University of Tennessee in his weekly comments November 11. “The wide spread could have significant implications for cattle which do not grade a high percentage of Choice. In addition this could very well trickle down to feeder cattle and purebred cattle. Down the road, should Walmart switch back to Select beef, additional ripples in the cattle ocean would be expected. Will their decision to sell more Choice have supply implications for programs such as Certified Angus Beef?”







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