Market impacts: Seasonal to lower prices expected this fall for cattleWritten by Gayle Smith
Whitman, Neb. – Beef producers can expect to see a few more years of declining cattle prices as the U.S. herd rebuilds its numbers, an agricultural economist told producers during the Gudmundsen Sandhills Laboratory 17th Annual Open House in Whitman, Neb.
Jessica Sampson, who works with the Livestock Marketing Information Center in Lakewood, Colo., said producers can expect less for their cattle as long as herd growth continues.
“Cattle inventory is projected to increase Jan. 1,” she said.
“Heifer slaughter year-to-date is actually one percent below last year. However, we have seen more heifers coming to the packer in recent weeks, compared to a year ago,” she continued.
Cull cow prices have also dropped significantly.
“In 2014-15, we kept a lot of cows in the herd longer, and now we’re sending more of those to the sale,” Sampson explained.
“We have slaughtered 10 percent more cull cows this year than at the same time last year,” she added. “We expect to see the seasonal decrease in prices of cull cows in October and November, so producers may want to plan ahead.”
Sampson said a 4.5 percent increase in annual production is expected this year, and another four percent increase is predicted for 2017.
“We have a larger inventory that is producing more calves,” she explained. “With four quarters in a row of lower prices, it may be an indicator to producers to slow down herd growth.”
Despite declining prices, producers are still seeing returns over $100 per cow. With estimated cow/calf costs more than $800 in most operations, it is realistic to expect these costs to decline because of corn, beans and wheat supplies, Sampson said.
Pasture rent will also need to decline to be more in line with the market, she noted.
With feedlots still struggling to get out of the red, Sampson sees feeder cattle prices at historically normal levels this year. The U.S. is carrying two percent more cattle on feed compared to last year, which is consistent with the 3.5 percent increase in cow inventory. Fat steers are selling around $1.19 a pound in the southern plains, she reported.
“For the most part, we expect to see seasonally normal price patterns this fall, although we expect a tightening in the fat cattle supply,” Sampson reported. “We may see a slight increase in the fourth quarter because we don’t expect the meltdown that we saw last year.”
She continued, “The conditions are entirely different. For one thing, feedlots are very current on their marketing right now. There are no backed up, overly heavy or overly fat cattle on hand like last year. The cattle feeders also have a better margin this year.”
Based on the fourth quarter and annual average, Sampson told producers to take what they sold calves for last fall and deduct 15 to 20 percent from that. She sees prices in the Southern Plains being around $1.72 for 500- to 600-pound calves, and in the high $1.40 range for 700- to 800-pound yearlings.
“We are projecting another three to four percent decline in 2017 on an annual average basis, which is reflecting the increase in the cattle supply,” she said.
Producers at the meeting expressed concern about the agreement to allow Brazil to import fresh, chilled beef into the U.S. Sampson explained that Brazil, like dozens of other countries doing business with the U.S., must adhere to a tariff rate quota system that limits the volume of beef that can be imported under this system.
“That limit is 65,000 metric tons on a first-come, first-serve basis,” she said. “After that quota is met, a 26 percent tariff will apply. At that point, it will be too expensive for them to send beef here. Because of this, I don’t think we will be seeing a huge influx of Brazilian beef coming into our market.”
Sampson also told producers that Brazil has market access to Russia and China, which are big markets for them.
“I don’t see them shifting their supply from those countries to the U.S.,” she explained. “They haven’t shipped any fresh or chilled beef here yet.”
One producer asked Sampson what impact Brazil could have on the cull cow market.
“The cull cow market is down two to seven dollars, and the sale barns are blaming Brazil,” the rancher said.
Sampson replied, “It is possible that lean grind imports could impact cull cow prices, but I would be hard-pressed to blame Brazil at this point. I think cull cow prices are down because more are being marketed. Brazil is definitely a concern though.”
Currently, most of the 90 percent lean grind imports into the U.S. are coming from Australia, but Sampson said as U.S. beef production increases, she sees those numbers declining.
“In 2016, that number was down 10 percent in the first half of the year. As we continue to increase production, I expect that number to continue to decline into next year,” she said.
Quarterly stocks reveal bearish corn, neutral wheat marketsWritten by Saige Albert
After the release of USDA’s Quarterly Stock and Acreage report, DTN Economist Dan Newsom noted on June 30 that stocks numbers set the stage for the markets moving into the remainder of the year.
“There were some interesting stocks numbers, to say the least, in this year’s report,” Newsom commented.
June, July and August are the fourth quarter of the marketing year, said Newsom, and at the end of the third quarter, stocks came in at much stronger than the pre-report estimate.
“When USDA released the number 4.72 billion bushels, that was more in line with what we were thinking, but well above the pre-report averages,” Newsom said. “The immediate reaction was corn sold off hard.”
At the same time, particularly concerning the old crop, July and September contracts start to come under pressure.
“The corn number was bearish,” Newsom said. “We have 4.72 billion bushels of corn on hand, as of June 1. We don’t have the breakdown of what’s on-farm and what’s off-farm yet.”
However, he says that regardless of distribution, the number is very large.
“We are well above what we had last year at this time, which was 4.45 billion bushels,” he remarked. “I think the real implication here is where it now projects ending stocks.”
With ending stocks predicted at 2.27 billion bushels, Newsom noted that the number seems dramatically inflated, but all indications show that it may be right.
“Right now, USDA is estimating in its June supply and demand report just a shade over 1.7 billion bushels. It all comes down to how we are estimating demand,” Newsom said.
Newsom estimates demand for the fourth quarter at just over 13.1 billion bushels, but USDA uses 13.6 billion bushels as their number for old crop.
“These are all just hypothetical numbers, and we won’t know until we get there, but this is a burdensome number,” he commented. “Regardless of the size of this year’s harvest, we still have a lot of stocks on hand, as we did June 1. The basis market knows that, and it’s been reflecting that. This is going to be a problem for corn, certainly over the next quarter.”
The last several years have shown consistent growth in corn demand, with demand in the third quarter skyrocketing last in 2009-10.
“Last year, we climbed back up to about 3.3 billion bushels, and this year, third quarter demand came in closer to 3 billion bushels,” Newsom explained. “We need a much stronger number.”
While Newsom realizes that demand numbers will adjust slightly throughout the summer, he noted that much larger than normal demand will be necessary in the fourth quarter to reinvigorate corn markets.
“Total demand now, through the first three quarters, was a dip below what we saw last year, and we’re below what we saw the year before that,” he said. “When we consider that we had such huge production in 2015, filling our pipelines, our bins and our stocks, we’re lagging right now.”
Newsom added, “This is not a bullish development for the corn market. We need to see stronger numbers.”
Overall Newsom noted that quarterly stocks of old crop corn will continue to weight on the markets.
While acreage isn’t as influential in his mind, Newsom noted that acreage reports are market movers.
“They are hand grenades, not horseshoes,” he said. “There’s nothing accurate, but it certainly looks like that’s what is at play in the markets.”
“I think the market reaction we’re seeing today, the drop in corn and the strong rally in soybeans, all has to be tied to what we see in the acreage numbers,” he said.
However, he further noted that the acreage planted numbers will change.
“There’s nothing set in stone about these numbers,” Newsom commented. “As I like to say, they’re written in pencil or invisible ink.”
The report showed 94.1 million acres of corn will be planted this year, which is an increase over the 92.76 million acres forecasted before the report.
“This is down from what was projected in Prospective Plantings report,” he said. “The general consensus was that corn acres were going to lose out to soybeans.”
He noted, however, that farming practices don’t lend themselves to large swings between crops.
“Corn was above the high end of the Prospective Plantings report,” he said.
Wheat stocks came in at 981 million bushels in the June 30 report.
“This number was in line with USDA’s June report and June supply and demand report,” Newsom said. “This is also about the 977 million from 2009-10, and wheat has a large ending stocks.
Bearish futures spreads have been seen lately for wheat, with winter wheat going into variable storage.
“They’ve increased the storage rates because the carry is so strong,” Newsom said. “This report doesn’t do anything but confirm how large supplies are, so there’s no real surprise here.”
Looking at acres planted, Newsom said, “If ever there was a market that needed something bullish, some nugget to hold on to, they didn’t get it. All wheat acres came in at 50.8 million. We saw a little bit over a 1 million increase from March’s Prospective Plantings report.”
“There were no bullish numbers in the wheat market and nothing to support the five to seven cent rally in the market, unless there’s one of relief,” Newsom added. “As winter wheat harvest rolls along, we’re starting to see a bearish situation.”
Beef producers will need to watch costs with market downturnWritten by Gayle Smith
Torrington – Producers may need to pinch pennies once again if they hope to remain profitable in the cattle business. According to Bridger Feuz, a livestock marketing specialist at the University of Wyoming, the beef industry is undergoing a downward trend in the market that could last a few years.
With a decline in exports and domestic per capita consumption, the record high prices producers have enjoyed during the last few years are a thing of the past.
Feuz said fundamentals would indicate price levels at or near $165 per hundredweight for 500-pound calves this fall, which is around $800 a head. He anticipates fat cattle in the $125 per hundredweight range.
Referring to a graph of break-even prices for feedlot producers, Feuz says there have only been a few months of positive returns for cattle feeders since 2007.
“Feedlots have really been hurting for the last couple years, but during the last few months, they are almost back to break-even,” he explained.
Last year was particularly hard on cattle feeders. When prices started a downward trend, feeders held onto fat cattle too long, hoping for price improvements. It caused a glut of very heavy, overfed cattle in the feedlot last fall into the winter. Those overfed cattle finally went to market during the winter months putting the market back in balance, Feuz explained.
“The packer chain is now set up to handle carcasses as big as 1,050 pounds,” he said.
Interestingly enough, the average beef carcass averaged 625 pounds in 1960. By 2010, the average had increased to 825 pounds.
Since then, Feuz said it has increased three percent and now averages 883 pounds.
“I think that brings up the question of whether producers can efficiently run that big of a cow,” he said.
According to USDA numbers, ranchers are beginning to rebuild the declining cowherd.
In January 2015, they retained 3.3 percent more heifers, although July 1 numbers showed an increase of 6.7 percent. With the price decline in 2015, Feuz said ranchers may have decided to breed more heifers instead of placing them in the feedlot.
In 2016, cattle inventory numbers were up 3.5 percent on Jan. 1, and the calf crop had increased 2.3 percent.
Despite the increase in numbers, Feuz said producers have done a good job of becoming more efficient with less head. However, he cautioned producers about growing too fast, or overpaying for replacements.
“Even if the market stays flat or increases just a little, I still think most producers are still overpaying for cows,” he said.
Declining exports have also played an important role in the price decline.
In 2015, the exchange rate changed a lot more than what was anticipated, and because of it, the U.S. lost some key export customers.
“Japan and Mexico were really starting to come back from the BSE (bovine spongiform encephalopathy) incident,” he explained.
“Then the exchange rate increased, so that flattened and declined the export market to these countries,” he said. “The export market is the key for price support.”
Domestically, per capita consumption of beef has steadily declined since 1992. Meanwhile, pork has remained steady, and chicken has steadily increased.
However, as Feuz reminded producers, “Demand is a function of what we eat and how much we are wiling to pay for it.”
While consumers are eating less beef, they are paying more for what they do eat, he explained.
He sees this as a trend that could change direction in the future. From 1990 to 1998, the beef industry saw a decline in beef demand, but it changed directions and climbed upward from 1998 to 2004. During that period, the Atkins protein diet was gaining in popularity, and campaigns like “Beef – it’s what’s for dinner” started, as well as beef quality audits performed by the National Cattlemen’s Beef Association (NCBA).
Feuz said demand trended downward again from 2004 to 2010 and is climbing again since 2010.
“People are not turning away from beef, even though it costs more,” he explained.
Feuz recognized that retail beef prices challenge consumers, and because of higher prices, many consumers have shifted preferences toward middle cuts like flat iron steak, shoulder value cuts and hamburger.
“These markets are still growing,” he explained. “Consumption may be down, but demand is up.”
Lamb markets see support early in summer monthsWritten by Saige Albert
The summer started with atypical support for the live, carcass and feeder lamb markets moving into the summer months.
“It’s not typical for us to start this early with market support,” said Brad Anderson, procurement director at Mountain States Lamb Cooperative (MSLC). “Generally, we’re still heavily into the old crop, California springs and lambs from Wyoming and Oregon, but this year, they’ve cleaned up faster than expected.”
This year’s trends resulted from a supply that shortened more quickly than expected, largely due to forecasting by East Coast lamb plants.
“This escalation doesn’t have anything to do with our consumer demands,” Anderson said. “We saw some of our competitors back east run out of lambs, so that moved the market up significantly.”
With fat lambs increasing, feeder lamb prices also moved up accordingly.
Companies in the East primarily source their lambs from the Midwest, which is a challenging market to test, Anderson explained.
“The average flock in the Midwest is less than 100 head. Those producers work independently, and it’s really hard to measure exactly what they’re doing – whether they decide to sell feeders early, retain them as fast, etc.,” he said.
Regardless of the cause, Anderson added, “We’re very, very current, and it looks like we’re going to stay that way.”
Demand for lamb has been a challenge for the sheep industry, but Anderson noted that work by the American Lamb Board (ALB) strives to highlight the superiority of American lamb.
“ALB is doing a lot in terms of local and source verified, and with new antibiotic directives coming out, a lot of consumers are starting to look at antibiotic-free lambs,” Anderson said. “MSLC is the largest supplier of antibiotic-free lambs in the nation, and we did close to 170,000 last year.”
ALB promotes American lamb, locally sourced products and more in an attempt to continue to sway customers toward a domestic product instead of imported lamb.
“Because of the strength of our dollar and lower prices, our biggest competitors are important,” Anderson said, highlighting that Australia and New Zealand imports are challenging. “If we’re going to lose customers, we’re going to lose them to imported products.”
Prices for lamb from Australia and New Zealand has also strengthened some recently.
“Whether that has to do with our dollar softening or tightening supply, we have seen some strength in import prices,” Anderson commented. “Also, there’s still an insurmountable amount of product in the freezer. It’s a lot, and we’re going to have to work through that.”
As summer progresses, Anderson said that lamb prices are likely to stay relatively high.
“Weights will be good, and yield grades will be good,” he said. “It should help that American lamb is a great quality product, and I think that markets could strengthen a little more.”
However, he notes that consumer demand is more difficult to predict.
“It’s yet to be seen if the consumer demand will follow that escalation in price,” Anderson commented. “I’m not sure if demand will reflect our price increases.”
He also noted that he sees profitability in the lamb feeding sector.
“Lamb feeders have not been profitable in the last three years due to the fact that when supply shortens, feeder and live prices escalate, then we stagnate and they can’t get lambs killed. That will be the challenge now, as well. We have to get enough supply but also keep lambs current so the feeders and producers can be profitable, as well as the packers.”
Anderson noted that MSLC’s acquisition of the JBS lamb plant has been beneficial to its membership, noting that the MSLC members should expect to stay current on a more consistent basis.
“It has also eliminated JBS in the marketplace buying feeders against our producers,” he said. “We will work hard as a more cohesive group to try to fill supply holes, as opposed to working as competitors.”
CattleFax predicts continued herd expansion, price optimismWritten by Saige Albert
CattleFax Analyst Lance Zimmerman said that the big correction in cattle prices predicted early in 2016 isn't happening, and instead, the organization has revised cattle prices even lower for all fresh beef, utility grade cull cows and calf prices for the summer.
“As we transitioned into 2016, which led us to initial lower revisions for the year, we had a lot of the same challenges from 2015,” Zimmerman said. “We expect better exports in 2016, but we’ll also talk about current-ness in the feedlot segment.”
Zimmerman looked at the impacts of the feedyard segment and its impact on calf prices during a May 25 CattleFax Trends+ webinar sponsored by Elanco.
While there is argument as to whether the cattle cycle still exists, Zimmerman noted that a 10-year market cycle has been seen for many years.
“We started at the beginning of this decade with record-high harvest numbers,” he said. “The drought combined into that, and we had good fed cattle numbers. We saw those numbers continue to erode as we dug into the supply.”
In 2014-15, Zimmerman noted that supply lows were hit, which resulted in market highs at the same point in time.
“Those market highs materialized in the fourth quarter of 2014 and the first quarter of 2015,” he said.
As 2015-16 came around, Zimmerman noted that a 30-plus percent price correction was seen, which is similar to historic data, relative to past cattle cycles.
“With the extreme correction we went through, we’re likely closer to the bottom of the cycle than we might be historically,” he said.
Zimmerman explained that the decline in prices is likely near its low point.
“As fast as we went up, it’s our expectation that we’re going to take the bulk of the price decline right off the bat,” he said. “When we look at the second half of the decline we went through in 2015, combined with the market that we’re dealing with today, the bulk of the price decline is already behind us.”
He continued that lower prices are likely through 2017 and maybe 2018.
“As we look at the marketplace, we need to recognize that the margin has transitioned back to the end user – the retailer, restaurant and even the processer,” Zimmerman said. “The cattle feeder, stocker operator or even the cow-calf guy will have tighter margins and tougher losses compared to what we were sued to earlier in this decade.”
Despite tighter margins, Zimmerman called the trend a “normal transition as we go through the expansion phase.”
In past cattle cycles, following major highs, as seen in the late 70s, early 90s, 2004 and 2014, a break is seen. For example, Zimmerman looks at 1991, noting that it represented one of the biggest breaks from cycle high to cycle low.
“It equated to a 48 percent break,” he said. “We’re already at a 41 percent break in the current cycle. A 48 percent break today from highs of $244 equates to a $127 feeder cattle market on a cash basis.”
“We’re still a ways away from realizing prices in the $127 to $128 range, but we need to be receptive of the fact that the market remains depressed,” Zimmerman commented. “A lot of this is happening faster and the market is more volatile than any of us would have expected. There is potential to see that market recover or at least trade steady.”
Looking at cow inventories, Zimmerman also noted that the base is still growing, demonstrated by the low percentage of heifers being sold as feeder cattle and calves and the percentage of heifers going into the fed production mix.
“All of these factors point to cow inventory continuing to grow,” he said. “The peak is not likely to be met until 2017.”
With a high cowherd predicted at 2017, Zimmerman added that peak production will not likely be seen until 2019 or 2020.
“It’s not out of the realm of possibility to talk about 2019 or 2020 setting new records for beef production,” he commented. “A lot of things have to line up perfectly, but that’s a situation that’s in the cards.”
“If we look at what it’s going to take to see a rally in the feeder cattle and calf markets in 2016, one of the first places we need to turn to is the source of demand,” Zimmerman said. “The source of demand in the feeder cattle markets is the seller of fed cattle.”
Persistent losses in the feedyard segment impacted calf prices, driving them lower in the last nine months.
“The feedyard segment went though a period of time in the last 12 months where they lost over $5 billion as an industry segment,” Zimmerman said. “Those losses continue to be extreme, and they continued through early spring.”
He continued, “This not only had an effect on feeder cattle prices, but it kept the sellers of feeders in negative equity territory, as well, hurting the calf market.”
The profits made by feeders from October 2013 to the end of 2014 has since been lost by feeders, and the equity drain on the market place created a challenge.
“In January, we talked about the industry looking at an extra 1.3 million head of cattle outside of feedyards on Jan. 1 to be placed,” Zimmerman said. “Placements have done a really good job from January through April, remaining on place with the available feeder cattle.”
While the market has been stale and the downtrend has continued, some feeders are seeing profits, and Zimmerman said, “I’d argue that the give-and-take is that they are operating around a breakeven. We’re starting to see feeder trends change.”
Zimmerman also noted that more cattle will likely be placed, and he expects the market to get back to the low-160s by August.
“If we get above that, it will be an opportunity for feeders sellers to be aggressive with marketing,” Zimmerman said. “Whether we look at the fed cattle markets as being seasonal or contra-seasonal, all of these patterns see movement high in the summer on average. It’s not a given, but at least there’s some reason for cautious optimism as we work into summer.”
Zimmerman added that calf markets are in much the same situation.
“When the fed cattle market, stockers or backgrounders are losing money, calf prices break,” he said. “Buyers are struggling to find calves to fill up the pastures that are greening up, but as we get into October, November and early December, supplies are going to be abundant and sellers are going to use that.”
“CattleFax expects calf prices to continue to recover as we work into the summer period as supplies naturally tighten and lift the market,” Zimmerman said. “As supplies start coming around in the fall, revisiting some of the lows that we saw earlier this spring are a definite possibility.”
Look for more from CattleFax in next week’s Roundup.