by: Wes Ishmael

Except for the herky-jerky nature of wholesale beef and fed cattle prices, the fall cattle market—buoyed by tight cattle supplies and cheaper feed costs—was a contra-seasonal wonder.

“Feeder cattle prices have strengthened this fall to the highest levels of the year,” said Derrell Peel, extension livestock marketing specialist at Oklahoma State University in November. “Heavy feeder prices are at record levels and, while calf prices have not quite exceeded the spring 2012 record price levels, they surely will in the spring of 2013, barring something unforeseen.”

That seems even more likely when considering fewer cattle numbers and less beef production as producers begin retaining more heifers.

In other words, Peel suggested that cattle prices in the last quarter of 2013 likely offered a preview of the market in 2014.

More of the Same

In more general terms, some aspects of the recently ended year probably reflect the issues that will shape the cattle business in 2014.

Political risk continues in the nosebleed seats, for one thing. At the beginning of last year the media was saturated with headlines about the impact and legality of Obama Care, the inability of Congress to solve its budget impasse or even pass a new Farm Bill. Other than a last-ditch December vote on the nation's budget—after sequestration and a government shutdown—those issues remain.

Although the nation's economy appears a bit sturdier as 2014 begins, with GDP growth a little faster and unemployment a tad lower, it feels shaky still. Consumers rightfully continue to express uncertainty about whether or not the nation has finally turned the corner out of the Great Recession.

Closer to home, consumers continued to express concerns about how their food was produced in 2013. Still reeling from the social-media-driven furor about Lean Finely Textured Beef the previous year, Russia shuttered its doors to U.S. beef unless it could be guaranteed free of beta agonist residue. By mid summer, Tyson quit buying cattle fed one particular beta agonist (Zilmax) believing it might be contributing to ambulatory problems in some cattle. The debate will surely continue this year.

Government, too, continued to exhibit and endless appetite for regulating how livestock is produced. By year's end, the Food and Drug Administration (FDA) issued final guidance aimed at restricting the use of antibiotics used to enhance livestock growth. And, the nation's Animal Disease Traceability program, began slowly and without fanfare.

Then there is the bitter harvest of previously sown regulations. Consider implementation of mandatory Country of Origin Labeling (COOL), which is pressuring packer costs, increasing consumer costs and violating the trade agreements the U.S. has with its most important trading partners, Mexico and Canada.

There is no reason to believe the government's regulatory strong-arm tactics will be any less burdensome in the new year.

That's before considering regulations imposed by customers. In the middle of December, for instance, various news reported suggested that Tyson Foods will require beef producers to comply with its FarmCheck program, “designed to ensure responsible care and overall well-being of farm animals…” The reports make sense. In May, Tyson established an independent Animal Well-Being Advisory Panel.

Completely Different

On the other hand, 2014 is off to an entirely unrecognizable start from last year.

The strong cattle markets mentioned at the outset are a difference, of course. Rather than climb seasonally in late winter and through the spring last year as many expected, prices stalled through a good portion of the summer before beginning the contra-seasonal demand enjoyed through the fall.

Through spring last year, herd liquidation continued as folks fought through a lack of hay and high feed prices. This year, of course, national drought conditions are significantly improved in most areas of the country. Instead of eking by on razor-thin ending corn stocks, the bins are full again, thanks to record production here and in Canada. Instead of penciling in corn at $6-$7/bu., producers are looking at $4 or so.

Plus, the Environmental Protection Agency even proposed reducing the ethanol mandate.

All of that is another way of saying that producers finally have the ability to begin national herd expansion, which should strengthen cattle prices further. This fall and early winter, prices for replacement-quality heifers and commercial pairs was heading due North. Bull prices, too, suggest folks are gearing up to breed more cattle.

Some of the price impact from the reduced cattle supply could be muted, however because true capacity rationalization appears to be finally starting.

Last February, Cargill shuttered its packing plant at Plainview, TX.

“…We were compelled to make a decision that would reduce the strain created on our beef business by the reduced cattle supply,” said John Keating, Cargill president when the decision was announced. “The U.S. cattle herd is at its lowest level since 1952. Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry. Our preference would have been not to idle a plant.”

It appears cow plants are likely the most vulnerable this year as cow supplies decrease.

In October, Cargill said it was going to close its feedlot at Lockney, TX (about 62,000-head one-time capacity) this summer. If a packer can't make cattle feeding work, you have to wonder who can.

According to the benchmark data kept by the Livestock Marketing Information Center (LMIC) since the mid 1970's, cattle feeders finally started making money again in September after 29 consecutive months of losses (cash-to-cash basis), but the high price of replacement cattle was already beginning to challenge breakevens, despite significantly lower feed costs.

“Looking ahead, even with the recent rapid decline in feedstuff costs, cattle feeding returns will be tempered by record high feeder cattle costs,” LMIC analysts said in November. “Breakeven sales prices for steers placed in recent months have surged. Red ink is expected to return as soon as December of this year. Further significant upticks in heavyweight feeder cattle prices will likely require at least parallel increases in fed cattle prices.”

Though cash fed cattle prices were around $132/cwt. on a live basis in mid-December, the futures market wasn't predicting much of an up-tick—contracts December 12 ranged from $127 to $134.

On the other hand, according to analysts with USDA's Economic Research Service (ERS) in the December Livestock, Dairy and Poultry Outlook, “The net result of lower corn prices and higher feeder cattle prices is that breakeven cattle feeding costs for cattle placed in Southern Plains feedlots are projected in the neighborhood of $127-$128/cwt. through at least the first quarter of 2014. With first-quarter 2014 fed cattle prices expected to average in the low $130s range, cattle feeders could experience a period of from near-breakeven to positive margins during the first quarter of 2014.”

Squeamishness about beef and fed cattle prices revolves around how much price pressure consumers can withstand.

Darrell Mark adjunct professor of agricultural economics at South Dakota State University explained in his weekly Cattle & Corn Comments last month that the all-fresh beef retail price average of 4.925/lb. through October was five percent higher than a year earlier. It was a record-high $4.977 in October.

“…Even if beef cow numbers are modestly higher at the beginning of 2014, it will likely be 2016 before beef production, and therefore beef consumption, begins to increase,” Mark explained. “In fact, beef consumption is forecasted to decline about five percent in 2014 to about 53 lbs. per person (retail weight equivalent). In 2015, beef consumption could drop to 52 lbs. per person.”

Though no one knows at what price point consumers may decide beef is too expensive, Mark says consumer beef demand in 2013 remained stronger than many expected when considering indicators such as the Beef Demand Index, Restaurant Performance Index and beef exports.

“A number of factors will determine the demand for beef in the year to come, including consumer tastes and preferences, consumer disposable income, prices of competing meats, general economic conditions in the U.S. and around the globe, and foreign exchange rates. While not an inclusive list, most of these factors have created a bit of a headwind for beef demand in the last year,” Mark said.

Mark ‘s concluding statement regarding demand seems appropriate for the 2014 outlook overall: “…given the strength of domestic beef demand at retail and good export market sales in this last year's challenging market environment, there is reason to be optimistic about beef demand in the year to come.”

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