The biggest question in the cattle business today is a simple one: Where are the market lows? To know the answer would be to know the parameters this market operates within. It's not a crazy question. Lately, however, it seems as impossible a divination as choosing numbers to win a billion-dollar lottery jackpot.
Chris Hurt, Purdue agricultural economist, said the beef industry has a history of knowing what the right price range is for cattle. He likens it to the price of a gallon of gasoline and what we think of as a low price or a high price based on our history of pulling up to the pump. In today's market, extreme price volatility makes it hard to know what is too high or too low.
With the beef market, it's the same thing: No one knows what the "right price" really is, Hurt said.
"The historical markers we had are gone. When you are trading at $70 to $100 a hundredweight [cwt], as we primarily did from 2003 through 2011, it's easy to say, 'This is the high, and this is the low.' We are in the process now of reestablishing our new normal."
Cattle producers got caught up in the excitement of Choice steer prices (five-area direct) averaging $161 per cwt over the last half of 2014 and the first half of 2015. But after May 2015, those prices fell sharply, averaging $136 per cwt over the last quarter of the year.
Hurt anticipates 2016 finished-cattle prices will see a yearly average of around $130/cwt. This accounts for a downward trend after the second quarter of this year.
Last year was a good time to be a cow/calf producer. Steer feeder calves weighing 500 to 550 pounds marked record prices in May at $290 per cwt (Oklahoma City). By December, however, those prices were at $194 -- nearly $100 less. Hurt said for 2016, he expects an average range of $185 to $205 per cwt on those same calves.
Will that be enough to keep cow/calf producers interested? Is it enough to encourage continued expansion? J.T. Henshaw believes it is.
The Kentucky producer and his cousin and business partner, Luke Henshaw, have added cows to their herd and expanded pasture area with the purchase of some strip-mine land. This year, they will have a 350-head commercial Angus cow herd.
The Henshaws' cattle operation is spread over Union County, Kentucky, and Gallatin County, Illinois. The growth of the operation has been steady during the past five years, during which time J.T. said they've added 100 head split between a fall- and spring-calving herd.
"When you can sell a 500- to a 600-pound calf for $1.80 a pound, there is still money to be made. Five years ago, we were selling that same calf for $1 a pound," he said.
J.T. added if prices continue to move downward, he has places he can cut costs, such as eliminating the creep feed he currently gives calves.
"We started creep-feeding as the prices went up to add pounds," he explained. "If we see prices fall, and feed gets high, we'll stop putting as much into them. So there are things we could do to keep the herd where it is in terms of numbers but reduce our costs."
J.T. is not alone in his positive outlook. Expansion has been widespread across the country for nearly 24 months now. The Central and Southern Plains have led in growth, with 60% of the nation's total expansion during the past two years. These areas destocked during drought, meaning part of the growth is, in fact, restocking as grazing conditions have improved.
Looking at the expansion regionally, the USDA reports the Southern Plains increased beef cow numbers 9%; the Central Plains, 5%; the Western Corn Belt, 5%; the Eastern Corn Belt, 5%; the Southeast, 1%; and the Northern Plains, 1%. This growth bumped up 500-pound feeder steer and heifer (not retained for breeding) supplies by 4%.
SHORTENED EXPANSION CYCLE
This expansion phase, as welcome as it has been, is unlikely to resemble those of the past, economist Hurt believed. He said while some analysts are predicting the growth cycle will last into 2020, he expected there is about one year left in the trend.
He said the shortfall of cattle in 2014 and 2015 caused such an explosion of prices, the expansion was unusually aggressive. He added that moderating finished-cattle prices are already taking some of the super stimulation of high profits away from cow/calf producers. As a result, he believes the expansion phase will be a short three- to four-year process going into 2017.
The biggest challenges the beef industry is likely to see this year, in terms of the market, will be focused on the feedlot side. Price fluctuations and market risks for finished cattle could be extreme, depending on how the 2016 crop season progresses.
"I am concerned about the size of our crops," Hurt said. "We've had two near-record years in terms of yield for corn and soybeans, and no one knows yet how this year will work out. We are looking at the lowest prices in nine years on corn and soy meal. Our feed markets are set up as though everything will stay cheap, and that can lead to surprises.
"But our feeders are used to this, and they have no doubt locked in these low prices. They know how to manage price risks, and these are big price risks."
A positive is likely to be a modest rebound in annual per-capita disappearance of beef at the retail level to 54.4 pounds. This marks a turnaround, from a continued loss in per-capita disappearance over the last several years. The low point, assuming the increase materializes this year, appears as though it would be 2015, when the level was 54 pounds.
A PRODUCER'S OPTIMISM
For producers such as J.T. Henshaw, risk and hard work come with the territory. And sometimes, when you're really lucky, it all works out just right.
"There's a lot of work involved in a cattle business. Just building and maintaining fences can be a full-time job. But sometimes it pays off," he said.
"Luke and I got in at the right time. We were lucky. We bought 80 pairs to come into the family business, and we got them for a decent price. Then cattle went through the roof, and we almost paid for those cows with the first calf. When that sort of thing happens, and you know you hit it about right, it makes you want to keep trying."
The export market for beef takes on a new level of importance, as prices look for a balance between supply and demand.
Just as U.S. beef producers are turning out more product -- 24.6 billion pounds this year, up from 23.7 billion pounds in 2015—global beef production is also expected to increase. During the next two years, price, new trade agreements and low feed costs will make beef an attractive commodity for sellers around the world.
Early projections called for another decline in beef exports in 2016, which would have been on top of a 12% drop in export sales between 2014 and 2015. However, more recently, some analysts have suggested another reduction in export sales may not take place, and marginal improvement is even possible.
Exports have been a top priority for the National Cattlemen's Beef Association. At the group's annual meeting, President Tracy Brunner stressed passage of The Trans Pacific Partnership (TPP) would be critical to future beef prices and export growth. The TPP was signed Feb. 4. Under terms of the agreement, tariffs on U.S. beef would be reduced in Australia, Canada, Japan, Mexico, New Zealand and Vietnam. In Japan, tariffs on fresh, chilled and frozen beef imports could drop as low as 9% over 16 years from current levels of 38.5%.
Another program, which drew mixed reactions from those in the beef industry, the Mandatory Country of Origin Labeling (MCOOL) law was recently repealed. The World Trade Organization imposed retaliatory tariffs of $1 billion authorized to Canada ($780 million) and Mexico ($228 million) if the law was not repealed.
Had MCOOL not been repealed, not only would the tariffs have been put into place, but all U.S. beef exports to Canada and Mexico would have stopped, and the additional tonnage would have dropped into the U.S. market, negatively impacting prices. Tod Kalous, market analyst with CattleFax, said this would have added 1.5 to 2 pounds per capita to the U.S. net beef supply.
"Adding that additional 1.5 to 2 pounds of beef to the U.S. supply, in addition to the increased tonnage of pork and poultry on the U.S. market, would be worth $8 to $12 [less] per hundredweight, according to our estimate, in the fed-cattle market," Kalous said.
Current USDA projections for 2016 beef and veal exports are 2.5 billion pounds—a 9% year-to-year increase. Imports for 2015 were projected to come in at 3.4 billion pounds (beef and veal) after accounting for reductions in beef from Australia and New Zealand. Despite that, compared to 2014, imports were 14% higher. That level is expected to drop in 2016, however, to 2.8 billion pounds, a 16% year-to-year change.
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