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Monday, August 16, 2010

Cattle Prices:  Forward, Reverse, or Neutral?


Earlier this year when cowboys pushed aside the scum on the watering hole and looked at the future of their business, they saw some uncertain profitability from feed prices and they saw the opportunity to get some decent prices from culled cows. The shrinking cattle herd was the result of their insight, and that is why USDA’s July 1 cattle inventory was the smallest on record. So what happens now?

Good spring and summer rains have provided good grazing lands for the cattle herd, but despite that, cattle prices have continued to rise and more heifers are going to market. That scenario points to more declines in the size of the herd say University of Nebraska livestock economist Darrell Mark and Erica Rosa of the Livestock Marketing Information Center. Their recent newsletter indicates cattle supplies will be tight for years to come. The July 1 Inventory tallied beef cows at 31.7 million head, which is down 2% from a year ago, and the number of heifers held as replacements was also down 2%. Mark and Rosa say that suggests any expansion in the cow herd will probably no occur until late 2011 and after. With feeder calves remaining on pasture longer, 3% fewer were in feedlots, and that mans tighter feeder cattle supplies ahead.

Cattle prices have gone higher and faster than most expected. That occurred because of improvements in the economy, smaller supplies of mean, strong demand from export customers, and the overall drop off in cattle weights because of the harsh 2009/2010 winter. Although those bullish factors occurred, overall beef demand is still sluggish with lower per capita consumption and softer retail prices.

Cattle feeders, which remained in business after 32 months of red ink, began seeing profitability in the later winter and returns have averaged $42 per head the first six months of the year after a $107 loss for the same period of 2009. Bankers reported that livestock operators were repaying debt and building equity with the new profits from 2010. Along with beef prices, feeder calf prices also climbed higher by $7 to $101 per cwt. That was also helped by sagging corn prices, which allowed feeding returns. That stemmed from the corn that had to be harvested wet last fall, and had to be moved quickly to the market this spring to avoid spoilage. Feedlots and feeder calf operators were the beneficiaries. Additionally, increased ethanol production also pushed larger amounts of DDGS to the market, and resulting feed prices were $10 per cwt less than in 2009.

The trend of smaller herd sizes and smaller beef supplies will continue for the balance of the calendar year say Mark and Rosa, who also say carcass weights will begin to increase and by the end of the year, they will be higher than they were at the end of 2009. As a result commercial beef production will not drop as much as slaughter numbers. Cattle prices are expected to be 11% higher than they were a year ago. Mark and Rosa expect fed cattle to average over $90 for the year, and that has happened only twice before. Feeder cattle prices will be a function of corn prices and the size of the crop, although USDA has indicated corn prices will edge higher because of a crop that has strong demand, yet will be a record in size.

What about 2011? Mark and Rosa say domestic demand for beef and global demand for by-products will be a determining factor in the strength of beef prices, along with competition from pork and poultry. But they identify other important trends:
• Cow herd liquidation in 2010 will cause beef production to further tighten over the next several years.
• Supplies of feeder cattle will also grow increasingly tight, yet prices will be heavily influenced by volatile feed grains market.
• Ethanol demand for corn will increase if a move to E12 or E15 is made, thereby limiting the downside potential from raising consecutive record-large crops.
• Further, world-wide wheat supplies are reported to be smaller than expected, fueling a rally in wheat prices that may keep some cattle from grazing wheat pasture this winter.
• If realized, some Southern Plains feeder cattle may be marketed earlier than normal next year.

The economists are also expecting feeder cattle prices to strengthen to $110 to $120; commercial cattle slaughter is expected to drop by 3%; and beef demand will remain a question mark, driven by the rate of the economic recovery.

The forecast for 2011 is relatively bright in that annual average fed cattle prices are expected to surpass the record set in 2008 (5-market average of $92.78 per cwt. in 2008). However, significant questions abound regarding the demand side. Additionally, volatility in feed grain markets can still make it difficult to realize a positive feeding margin.

Posted by Stu Ellis on 08/16 at 01:33 AM | Permalink

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