HUNTIN' DAYLIGHT -- DEMAND UNDERPINS MARKETS SO FAR

by: Wes Ishmael

Wherever cattle prices go through the second half of the year, they're starting from a higher point than many expected amid the long anticipated and feared bulge in summer fed cattle supplies.

“Despite beef production up nearly four percent so far this year, beef demand has been quite strong and has limited beef and cattle price pressure in the first half of the year,” explained Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his July market comments. “Domestic beef demand has been buoyed by strong macroeconomic performance, including a declining unemployment rate.”

International demand also continues at a torrid pace.

U.S. beef exports set a new monthly value record in May at $722.1 million (latest data available), which was 24 percent more than a year earlier and four percent more than the previous record, according to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF). In terms of volume, May beef exports of 117,871 metric tons (mt) were the sixth most on record.

Beef export value averaged $313.39 per head of fed slaughter in May, up 18 percent from a year ago. The January-May average was $317.69 per head, also up 18 percent.

Calf and Feeder Prices Similar to Last Year

In terms of calf and feeder cattle prices, Andrew P. Griffith, agricultural economist at the University of Tennessee noted in his early-August market comments that in his part of the country—also true in many areas—calf and feeder cattle prices remain similar to last year, offering opportunities for positive returns.

“In the fourth quarter of this year, calf prices may average slightly below 2017's, but substantially above 2016's,” say analysts with the Livestock Marketing Information Center (LMIC), in a recent Livestock Monitor. “If the general trends of the first half of 2018 persist, as of Jan. 1, 2019, the U.S. cowherd likely will be up well less than 1.0 percent year over year. That suggests cyclically stronger calf prices are ahead (e.g., calf prices in the fall of 2020). Pre-planning may position a cattle operation to take advantage of this market transition.”

The July Livestock, Dairy and Poultry Outlook (LDPO) pegged feeder steers prices (750-850 lbs., Oklahoma City) in the third quarter at $140-$144. That's $6 more on the lower end of the range than the previous month's estimate and $4 more on the upper end. The fourth-quarter estimate is $136-$144, compared to the previous month's projections of $134-$142. First-quarter feeder steer prices next year are projected at $133-$143.

Cattle Cycle Continues Flatter

“The modest increase in beef cows, combined with a smaller inventory of beef replacement heifers, suggests that herd expansion is slowing even more in 2018 after slowing in 2017,” Peel explained in late-July market comments. “However, the ratio of July 1 to Jan. 1 beef cow inventory is 102.4, a level that historically implies positive herd expansion in the current year. The ratio is down from 2015 and 2017 levels (no mid-year Cattle report in 2016), again indicating slow expansion for the current year and perhaps a peak in the cow herd inventory in 2019.”

According to the mid-year Cattle report from USDA, there were 32.5 million beef cows in the U.S. inventory July 1. That's 0.93 percent more (+300,000 head) than last year. Beef replacement heifers of 4.6 million head were 2.13 percent less (-100,000 head) than last year. For the record, all cattle and calves July 1 was estimated at 103.2 million head, which is 0.98 percent more (+1 million head) than the same time last year.

“The NASS survey largely confirmed that the national herd is still growing, but importantly, at a moderating pace compared to that of recent years,” LMIC analysts say. “Looking ahead, smaller herd growth rates will translate into the rather modest year-over-year increase in beef production in 2019. If recent cowherd trends persist, 2020 could mark the end of the current U.S. cattle inventory build-up.”

Moreover, Josh Maples, Extension livestock economist at Mississippi State University points out cattle cycles continue to flatten over time. That's due to increased beef production with fewer cows.

“The largest total cattle inventory on record was in 1975 at 132 million head of cattle—nearly 38 million more than the January 2018 report showed. The resulting beef production in 1976 was 25.7 billion pounds,” Maples explains in the Jul 31 issue of In the Cattle Markets. “In 2018, with 38 million fewer total cattle than 1975, beef production forecasts are around 27.3 billion pounds…It doesn't take a 20 million-head increase to trigger enough beef supply pressure on prices to signal producers to retain fewer heifers.”

Maples is referring to the current advanced stage of cyclical expansion and the likelihood cow numbers will reach a peak in the next year or two.

“The average trough-to-peak growth for the four cycles that occurred between 1938 and 1979 was about 20.3 million head,” Maples says. “The same average for the three cycles that occurred between 1979 and 2014 was just 4.8 million head. For 2018, we are about 5.9 million head above the starting low point in 2014 for the current cycle.”

Markets Fade Heaviest Seasonal Supplies

Whether the plateau in beef cow numbers is nearer or further away, prices through the summer suggest consumer beef demand helped cattle feeders and beef packers wade through the feared supply swell easier than expected.

For January through June, accumulated beef production was four percent more than last year at 13.19 billion pounds, according to the July Livestock Slaughter report from USDA. Commercial red meat production was also four percent more for the same period at 26.3 billion pounds.

July's World Agricultural Supply and Demand Estimates (WASDE) projected beef production for this year at 27.15 billion pounds, slightly higher than the previous month on expectations of increased cow slaughter in the third quarter.

For next year, though, WASDE projections for beef production were reduced to 27.69 billion lbs. from 27.72 billion pounds the previous month. That's on anticipation of lighter steer and heifer carcasses through the first half of the year.

Although still nothing to brag about, estimated feedlot returns are more positive than expected a few months ago.

“Despite firm feeder cattle prices in June and early July, the projected feedlot margin for feeding out a 750-lb. calf appears to have improved, and with lower corn price forecasts for the current and following marketing years, demand for calves for finishing may increase, supporting higher feeder calf prices,” say ERS analysts, in the LDPO.

ERS projects fed steer prices (5-area Direct) at $107-$111 in the third quarter and at $108-$116 in the fourth. The annual price for next year is projected at $113-$122.

By the end of July, wholesale beef values appeared ready to emerge from the seasonal summer ebb and provide more support to fed cattle prices.

Although wholesale beef prices remain a touch lower compared to the same time last year, Griffith noted toward the end of July the seasonal decline is significantly less.

“No one knows for sure which way the market will move going forward, but the expectation is for lower prices to consume the market due to increased production,” Griffith says. “However, market analysts have consistently undervalued beef demand, which has supported cattle prices all year.”







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