HUNTIN' DAYLIGHT -- FLATTER BUT BROADER

by: Wes Ishmael

While cattle markets since the first of the year continue to amaze, apparently widespread profits across industry sectors cloud the notion of how long and far the nation's cowherd will continue to expand.

“The beef herd expansion we've seen from 2014 to 2017 has been the most aggressive three-year start to any expansion on record,” says Trevor Amen, animal protein economist at CoBank. “Recent slaughter numbers and the cattle on feed mix indicate the expansion rate is slowing, but barring any significant export market disruptions or weather events, expansion will continue through the end of the decade.”

In a recent report from CoBank's Knowledge Exchange Division, analysts project total beef production increasing three to five percent annually in 2017, 2018 and 2019.

Similarly, Rabobank analysts expect the U.S. cowherd to expand another 1.6-2.2 percent over the next two to three years, with beef production in 2022 higher than the last cycle's peak in 2008.

Closer to home, Derrell Peel, Extension livestock marketing specialist at Oklahoma State University explains that the percentage of heifers in the mix of feedlot placements and fed cattle slaughter is growing, but at levels that suggest continued herd expansion. He expects one to two percent growth in the cowherd this year and then flat to minimal growth next year.

“Quarterly on-feed estimates in the October report (Cattle on Feed) showed that the number of steers on feed was up 1.6 percent year over year on Oct. 1, while the inventory of heifers in feedlots was up 13.0 percent from one year ago,” Peel explains in his late-October market comments. “This indicates continued growth in heifers on feed (July 1 heifers on feed were up 10.6 percent year over year). Heifer slaughter so far this year is consistent with these inventory totals, up 12 percent year over year, and suggests that heifer slaughter will continue to grow for the foreseeable future. These numbers suggest that heifer retention (and likely herd growth) is slowing. However, the average ratio of steer to heifer slaughter (which peaked recently in 2016) and is adjusting down, is still at levels not seen since 1975 (prior to mid-2015).”

So far this year, markets continue to encourage expansion.

“Cow-calf producers are selling weaned calves for $150-$200 per head more than last year,” Peel notes in his month-end market comments. “Heavy feeder cattle prices have not declined seasonally; rather, they have increased seasonally this fall.”

For perspective, Peel explains 7-weight steer prices increased about six percent from August to October and are 25 percent higher than last year.

“Earlier in the fall, feedlots were losing some money and appeared to be paying too much for feeder cattle and thus jeopardizing feedlot margins for the coming months,” Peel explains. “However, cash fed cattle prices have improved recently, increasing current margins. Cost of gain is expected to stay very favorable for the foreseeable future. Moreover, Live Cattle futures prices pushed higher recently to levels that come close to supporting current feeder prices for cattle finishing through next April. As with Feeder futures, the Live Cattle futures pricing opportunity may be short-lived.”

Back to the cash price increase for heavier steers. It elevates the value of gain, encouraging cow-calf producers and stocker operators to add more weight to cattle outside of feedlots, according to Peel.

As an example, he ran the numbers at the end of October for adding 250 lbs. to a steer calf weighing 500 lbs. The value of gain was $1.35/lb. He also notes Feeder Cattle futures continued to offer opportunities to lock in favorable margins.

“Strong demand is what makes all of this possible,” Peel says. “Boxed beef prices recovered about $10/cwt. from the early fall lows. Retail beef prices are holding close to year-ago levels despite a four percent increase in beef production in 2017. Demand is strong in both domestic and international markets, with year-to-date exports up over 14 percent. Strong demand is the key to allowing all sectors of the industry to have decent margins simultaneously and will be the key as beef production continues to grow in 2018.”

“Profitability for cow-calf producers was at record levels in 2014 and 2015,” explains Amen. “Historically, average profitability at the cow-calf level has to dip below breakeven to trigger a transition from herd expansion to contraction.”

Cattle Cycle Volume Less Variable

The venerable cattle cycle is still in play, though it was easy to forget about as the industry trudged through prolong drought and herd liquidation.

In general terms, the cattle cycle refers to the periodic expansion and contraction of the cowherd and beef production—driven by generally higher prices when there are fewer cattle and vice versa—including the lag time associated with the inherently slow biological cycle of beef cattle.

Keep in mind that cattle cycles continue to flatten over time. In other words, there's less distance between the cycle high and low for cattle numbers over time.

Earlier this year, Glynn Tonsor, agricultural economist at Kanas State University, along with Ph.D. graduate student, James Mitchell, took a hard look at cattle cycles since 1938.

“The variation of inventories within a given cattle cycle are declining over time. The range between maximum and minimum inventories has declined over the past four cycles,” Tonsor and Mitchell explain in Evaluating Cattle Cycles: Changes Over Time and Implications. “A central reason beef cow inventory variability within cycles has been declining over time is the industry has responded by adding more pounds of beef produced from each cow in the herd. Slaughter weights have persistently increased over time offsetting declining beef cow inventories resulting in increasing beef production.”

In other words, fewer cows are needed to produce the same amount of beef.

“The observation of beef cow inventory variability within cycles declining over time has direct implications for producers evaluating the current situation and contemplating entry-exit decisions in the context of where the industry is at in the current cattle cycle,” Tonsor and Mitchell say. “Narrowly, producers should recognize the industry's efficiency gains as evidenced by increasing slaughter weights offsetting declining inventories and subsequently note the national beef cowherd is unlikely to return to historic levels.”

Another reason for less variation over time, and a current wild card, has to do with overall industry maturity.

“In the U.S., animal agriculture sectors are fully mature industries. Therefore, domestic consumption of animal proteins has reached, or is close to reaching, a saturation report,” says Rabobank analysts Don Close and Sterling Liddell. “…Total consumption of animal protein in the U.S. is not expected to grow much beyond the old peak established in 2008.”

Liddell and Close authored Rabobank's recent U.S. Long-Term Beef and Cattle Outlook.

None of that means the U.S. industry can't grow. However, industry maturity suggests that opportunity for production growth here lies with demand growth outside of the United States.

“Beef demand has exceeded expectations so far in 2017,” Amen says. “A price rally and favorable margins for feeders and packers have bolstered overall industry profitability. Strong beef exports are critical to keep supplies in check and support prices. Exports are currently on pace to increase seven to nine percent in 2017 and five to seven percent in 2018.”

“The industry will be squarely focused on maintaining export growth and strong domestic consumption in the face of growing supplies,” Amen says. “Increasing dependence on export markets offers the industry significant growth opportunities, but also increases uncertainty and the risk of domestic oversupply.”







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