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That, following a decade of financial shock and adjustment stemming from the Great Recession. For cattle producers, throw in more than a decade of sifting and shifting the impacts of the ethanol-induced commodity price shock and then massive price swings in cattle and beef markets spawned by historic drought.

For the growing domestic economy, the transition means a return to the rising inflation and interest rates that accompany a growing, fully-employed economy. For cattle producers, it means narrowing margins and even more price volatility.

Chances for Cattle Profit are Declining

Cattle producers remain strongly positioned to ferret some profitability from the year. That could be a few dollars per head or near $100 for cow-calf producers, depending on which analysts you consult, as well as the cost structure of individual operations. But, margins will likely narrow across all production sectors, even before considering the nascent, expanding drought across a wide swath of cattle country.

At its recent 2018 Industry Outlook, CattleFax projected the average price for feeder steers (750 lbs.) at $145/cwt., with a range from the upper $120s to $160/cwt. CattleFax pegs average steer calf (550 lbs.) prices at $158, ranging from $170 for the spring high to the upper $130s for the fall low.

For both this year, and in terms of the current cattle cycle, CattleFax CEO, Randy Blach, says demand may keep calf prices above the cost of production for low-cost and average-cost producers.

CattleFax projects the average fed steer price this year at $115 with a range of $110-$130/cwt. The most recent World Agricultural Supply and Demand Estimates project fed steer prices at $122-$126 in the first quarter; $117-$125 in the second; $110-$120 in the third; $112-$122 in the fourth.

CattleFax expects input costs to remain manageable, with grain prices expected to remain steady. However, with more livestock to feed in 2018 and the smallest acreage on record last year, CattleFax predicts hay prices will increase $10-$15 per ton with additional weather-related price risks.

Expanding drought continues to force more cattle off pasture, while increasing the need of more feed earlier for cattle that are retained. Even without dry conditions, pasture prices continue to accelerate.

For example, pastureland and ranchland values increased faster than cropland values in the fourth quarter, according to the latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis.

That was for states within the 8th Federal Reserve District: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

Quality farmland values in the area rose five percent in the fourth quarter, compared to a year earlier, while ranchland and pastureland values increased 14.8 percent. Cash rents for Quality farmland increased 3.9%, while rents for ranchland and pastureland rose by 10.1 percent.

As for price volatility, Blach noted that price swings of $40/cwt. ($550 per head) for fed cattle are common from highs to lows during the past three years. Shorter term, he says it's common to see daily cash fed cattle prices move $14-$18/cwt. within two or three weeks.

More broadly, Blach highlighted feedlot profits and losses in recent years: $4.5 billion profit in 2014; $6.5 billion lost in 2015-16; $4 billion profit last year. These figures are based on a simple average without price risk management.

�These equity swings are unprecedented and the reason risk management has increased,� Blach says. �We think this will continue. We think we'll have more price volatility than at any time in the past.�

Economic Strength and Demand

Cattle markets are unfolding against the backdrop of a strengthening domestic and international economy.

�Expect an expanding global economy, strong U.S. consumer confidence and persistent economic recovery in many rural areas, but temper that optimism with another year of on-farm belt tightening due to lingering financial stress from low commodity prices,� says a recent, wide-ranging 2018 outlook report from CoBank's Knowledge Exchange Division.

Notwithstanding the canyon-wide, volatile swings on Wall Street in recent weeks, the domestic economy continues to strengthen�growing GDP and wages, historically low unemployment and general consumer optimism.

�Consumer confidence and the unemployment rates are at their best levels since 2000 and inflation-adjusted wages have been growing faster than the historical average since 2014,� according to the CoBank report. �Add in the major gains in housing prices and the stock market, and you get a wealth effect that is causing consumers to save less and spend more. Business investment will rise in 2018 to keep up with the strengthening demand.�

After years of slow, stable growth characterized by limited volatility, domestic economic growth will likely come with growing inflation and interest rates�a primary contributor to the Wall Street rollercoaster of late.

Internationally, the growing economy means more consumers have the jingle to buy more U.S. beef.

U.S. Beef export value last year averaged $286.38 per head of fed slaughter, up nine percent from 2016 and the second highest on record, according to data released by USDA and compiled by the U.S. Meat Export Federation. The value of U.S. beef exports last year exceeded $7 billion for only the second time in history.

For broader perspective, Kevin Good, CattleFax senior analyst explained at the aforementioned Outlook session, �The balance of trade improved by one billion lbs. between 2015 and 2017, offsetting 40 percent of the production growth.�

Beef production will continue to expand for at least a couple more years, considering last year's ongoing herd expansion. There were 31.72 million beef cows to start this year, according USDA's recent Cattle inventory report. That's 509,800 head more (+1.63 percent) than Jan. 1 of 2017. CattleFax analysts say additional expansion of 200,000-400,000 beef cows is possible over the next several years.

CattleFax projects beef production this year three percent more than last year at 27.5 billion pounds, ultimately peaking at more than 29 billion lbs. for the cycle.

�Beef production in the U.S. is on the rise, and export outlets have never been more important,� says Trevor Amen, industry analyst with CoBank's Knowledge Exchange Division. �However, the U.S. is threatening to retreat from key trade deals and the U.S.'s beef exporting competitors are forging their own deals with major global beef importers.�

In a separate CoBank report, Amen analyzes the impact of trade uncertainty on U.S. beef exports. He points out that approximately 80 percent of U.S. beef exports are sold to countries that could be affected by ongoing trade pact negotiations. Those trade deals included the Trans Pacific Partnership from which the U.S. withdrew, along with renegotiation of the U.S.-Korea Freed Trade Agreement and the North American Freed Trade Agreement.

�We have to see these exports grow,� Blach says. �We'll need to see record export numbers through the balance of the decade to keep supplies from overwhelming the market.� He adds that overall demand will be the key to maintaining fed cattle prices in the $100 area through 2020.

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