Market outlook - Economist predicts cattle market to continue to climb in 2015Written by Gayle Smith
Although cattle prices may be reaching their peak, Jim Robb, director and senior agricultural economist of the Livestock Marketing Information Center, still expects prices to be higher next year and possibly into 2016, depending on the size of the corn crop and other moving parts of the market.
“This is a fundamental cattle market,” Robb explained. “It seems like there should be something in supply and demand to support this market.”
“We are starting to see the erosion of prices looking ahead tipping downward,” he continued. “What we don’t see is an aggressive rebuilding of the cowherd after the first round of higher prices.”
Despite reaching its peak, Robb doesn’t see the market collapsing.
“I think the outlook is pretty darn good. But, the pace of the market is pretty much behind us. We are not going to see $80 bids next year or the year after unless something drastic happens,” the analyst said. “Things change. Markets change and times change, but that is the outlook at this time.”
Surprisingly, consumers have kept purchasing beef, even in an uncertain economy. The average U.S. consumer, in terms of spending power, is still poorer than they were pre-recession, Robb said.
Although the U.S. economy shrunk this year, beef demand did not decline in the first quarter.
“It held its own in a very difficult economic climate,” Robb added. “In the second quarter, beef demand grew.”
Robb explained this is because consumers who were going to quit eating beef already have.
“Beef demand has improved in the United States, especially in the second quarter of this year,” he said.
Foreign consumers are more price-sensitive than U.S. consumers when it comes to beef.
“If prices go up, they tend to buy less, which is the normal supply-demand relationship,” the economist continued. “But, the foreign consumers also stuck with U.S. beef in these markets. We expected it to go down with these record high prices, but we have never got so much value out of beef exports. Foreign demand is still surprisingly good.”
The United States is also expecting a record high corn crop this year of over 14 billion bushels, which will also keep cattle prices up.
Robb expected the corn crop to be slightly smaller by 2016, but the price profile will still be around $3.25 to $3.55.
“Ethanol is no longer a driver in the livestock market like it once was,” he explained. “It is now a mature industry that will not knock the livestock industry around like it once did.”
“It has changed dramatically to produce a corn profile like we had five to six years ago,” he added. “Corn prices will probably stay rather low for a long time, probably until we have another short corn crop.”
As long as cattle prices are high, herd expansion will be slow. Robb said heifer expansion was only 1.2 percent this year.
“There is just not much herd growth,” he commented.
Looking at the numbers, Robb said heifer slaughter is at about the same rate as heifer hold back. Cow slaughter numbers are also low.
Robb noted, “That is why cull cows are $1.35 right now.”
“It is going to take a long time to get back to the herd numbers we were at before this price peak,” Robb stated. “I am not sure we will ever get back there. There is going to be only modest growth in the herd after we get to the initial build back. So, we are expecting a rather slow decline in cattle prices.”
The spine of the cattle business, he said, is from Texas to North Dakota. It is in this part of the country that expansion will occur when it does happen.
Expansion has already begun in Texas, but Robb says it won’t ever reach the level it once was. Producers in that state are able to get agricultural exemptions on their land by claiming it as wildlife environment, without having to plant crops or run cattle.
In California, the beef herd continues to shrink as the state suffers from severe drought, and pastureland is being converted to orchards and vineyards.
Robb said people wonder what has kept beef production at the levels seen in 2011, 2012 and 2013. His answer is increased carcass weights and decreased cow kill. In 2014, not only have fewer steers and heifers come to market but also fewer cull cows.
“All of a sudden, cow prices are inflated because of this,” he said.
In the coming year, Robb expected beef supplies to remain tight and demand to become the driver of the market.
“Whether the beef industry likes it or not, the dairy industry is also becoming an increasing component in feeder cattle supply,” he noted.
On a final note, Robb said the futures market is bearish.
“They are expecting a lot of things to happen, and a lot of things to happen quickly,” Robb said. “Apparently, they expect changes in the beef, pork and chicken industries by next year. Clearly, it is record high territory, but the question becomes, when will prices peak?”