HUNTIN' DAYLIGHT -- COW HERD AND PRICE TRANSITION UNDERWAY

by: Wes Ishmael

If anything, the nation's beef producers are growing the cow-herd faster than some suspected.

Total cattle inventory in the U.S. is two percent larger than last year at 98.4 million head, according to the semiannual Cat-tle inventory report from USDA. That's in comparison to an up-ward revision by USDA to last year's number. This is the first increase in July-to-July numbers since 2006.

There are three percent more beef cows (30.5 million head total) than last year. There are seven percent more beef replace-ment heifers (4.9 million head total).

That follows the year-over-year increase in January of one percent for the total cattle inven-tory, two percent more beef cows and four percent more beef re-placements.

A key driver of such heady growth has been, of course, the lushest average pasture condi-tions in two decades. What's more, El Niño conditions appear to offer continuing help to some of the areas hardest hit by drought. According to NOAA and the National Weather Service, there is a greater than 90 percent chance that El Niño will continue through Northern Hemisphere winter 2015-16, and around an 80 percent chance it will last into early spring 2016. These weather analysts say temperature and precipitation impacts associated with El Niño are expected to remain minimal during the Northern Hemisphere summer and increase into the late fall and winter.

“Over the last 12 months, beef breeding herd growth has gained significant momentum,” say ana-lysts with the Livestock Market-ing information Center (LMIC). “This year will be the second consecutive year of significant increases in heifers being devel-oped for breeding herds and sets the stage for further herd growth, mainly of beef-type heifers over 500 lbs.”

Although drought can curtail expansion plans, and the folks at LMIC note that cattle imports and cow culling rates remain major wildcards for the remainder of the year, they cur-rently expect the total cattle in-ventory January 1 of next year to be 92.4 million head—three percent more year-over-year.

“With an additional upswing in the range of 1.5 percent to 3.3 percent, the herd as of January 1, 2017 could total about 94.6 mil-lion head,” LMIC analysts said at the end of July. “By the next report (January 1, 2018), the number of cattle could easily exceed the prior peak count, which was set on January 1, 2007.”

Prices Begin Cyclical Decline

Prices certainly have a more seasonal feel to them.

“After two years where sea-sonal trends disappeared for all practical purposes, the seasonality of the beef complex appears to be rounding back into form,” explained Andrew P. Griffith, agricultural economist at the University of Tennessee, in his market comments heading into August. “The summer months have resulted in softer prices for wholesale beef, finished cattle, feeder cattle, calves and slaughter cows. The sheer magnitude with which prices have declined seems large and it is. The percentage change in prices is slightly higher than the historical range of cattle and beef price declines from spring highs through the end of July.”

In a mid-July Livestock Moni-tor, LMIC analysts explained, “Cyclical transitions to lower cattle prices are expected to be-come more-and-more apparent in the second half of this year. Still, through 2016 prices will remain high by historical standards. Look for prices to erode year-on-year rather than collapse.”

According to LMIC, the AMS-USDA 5-market, negotiated fed steer price peaked in the fourth quarter last year at $165.59. LMIC analysts expect a decline of five percent and six percent respectively in the third and fourth quarters, year-over year.

LMIC forecasts yearling steer prices (700-800 lbs., Southern Plains) to be $12-$16/cwt. lower in the third quarter, year-over-year, and 10-15 percent lower year-over year in the fourth quar-ter.

As for calves, LMIC projects prices in the third quarter to re-main higher year-over-year and then be eight percent less year-over-year in the fourth quarter.

“The main driver behind year-over-year declines in fed cattle prices in coming months will be increased beef supplies,” LMIC analysts explained. “Secondarily, pork and chicken will be abun-dant in the domestic market. One driver behind yearling and calf price increases has been declining feedstuff costs, a trend that has run its course at least well into 2016.”

In the meantime, Griffith notes, “The big question is if the summer lows are now in or if the market is just taking a breather before dipping lower. Some of the technical analysis indicates even lower fed cattle prices, but fundamental analysis would lean toward a steady trade to slow firming in the market over the next few weeks. Regardless if the market strengthens, softens, or stays the same; prices are not expected to make any drastic moves over the next several weeks, as August is not known for its beef movement. Live cattle prices will likely have to sit in anticipation that Labor Day spurs beef movement towards the second half of August. There is not going to be the same upside potential that was experienced one year ago.”

Further down the road, LMIC analysts explain a larger calf crop in 2016 suggests another increase in beef production for 2017. “How quickly prices erode with increased beef production de-pends on demand, both domestic and likely more importantly for-eign,” they say.

Though still contributing $300 per head of fed slaughter to fed cattle prices through May of this year, U.S. beef exports continue to be challenged by a range of factors, according to the U.S. Meat Export Federation (USMEF). Those challenges in-clude the higher value of the U.S. dollar, increased production and exports of competing meats by other nations and the continued lack of U.S. access to key mar-kets.

For instance, Philip Seng, USMEF president and CEO ex-plains China remains closed to all beef exports and to most U.S. pork exports.

“China is one of only a hand-ful of international markets that never reopened to U.S. beef fol-lowing the 2003 BSE case,” Seng explains. “At that time, and for several years thereafter, China was not a large importer of beef. But that changed dramatically in 2012, when beef import demand in China surged due to strong economic growth and a sharp decline in domestic production. China now imports more beef every month than it did in an entire calendar year in 2011.”

Domestically, although beef demand remains stronger and more resilient than many antici-pated, the fact is that it has never regained demand levels seen in 1990.

“The quicker calf prices drop, the sooner the breeding herd ex-pansion will run its course,” ac-cording to the LMIC folks. “Since 1967, there have been four herd build-up periods (total cattle population) lasting eight years, three years, six years, and most recently three years.”







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