Leverage Shifts

Every year, the CattleFax outlook session is a much-anticipated part of the National Cattlemen's Beef Association's annual February meeting. This year's virtual version continued to show there's high attendance where prices and market insights are the topic.

Growth, demand and export potential for beef were all key factors in the outlook, which showed some shifts in leverage for feeders moving forward.

Kevin Good, CattleFax vice president of industry relations and analysis, noted the cattle industry has seen gains in productivity, despite a smaller cow herd at 31.2 million head -- a 1% decline over 2020. Increased carcass weights are the main reason for improved productivity, but the analyst added gains in numbers of weaned calves per cow exposed, as well as increases in the amount of beef the dairy industry is producing, have played important roles in where the numbers sit today.

(For background on this issue, read the author's earlier article: "Beef Brings Dairy a Profit Boost" at https://www.dtnpf.com/….)

Good said beef cow inventory will drop another 200,000 head this year, followed by another drop of 350,000 head in 2022. U.S. steer and heifer slaughter is projected up 2.4% for 2021, at 620,000 more head, but cold carcass weights, which have been increasing about 5 pounds each year, are expected to drop 4 pounds for 2021, to 826 pounds. Those declines, and subsequent pressure on supplies, will be more apparent the second half of the year. All told, beef production will add up to some 27.6 billion pounds for 2021, up 500 million pounds, or 1.7%. Compared to other proteins, beef production is up, while pork is down 1.5% and poultry is up 0.1%. Altogether, red meat and poultry production is basically flat for 2021.

Exports and imports will change approximately the same percentage, with 2021 U.S. beef exports projected up 5% and imports down 5%. The increased exports are expected to go to Japan, South Korea and China. Declines in imports are expected from Australia and New Zealand. Good noted that, for 2021, they expect beef export value per head to be $325, up from $313 in 2020. He said 20% of the value of fed cattle has come from the export market since 2017, and the industry needs to continue to emphasize growth in this area.

Good added that, moving through 2021, a big story will be the shift in leverage between sectors throughout the U.S. cattle business. They project the fed cattle price, as a percent of the composite beef cutout price, at 49% -- up from 43% last year.

"There are plenty of dollars in the system," he said. "Last year, the feeder received the lowest percentage [of fed cattle price as a percent of cutout] on record because they had no leverage. We think leverage in 2021 goes back to pre-COVID levels. Today, there are still record numbers on feed, so there are challenges short term, but it will be easier to get a bigger piece of the pie in the second half of the year."

Looking at price projections, Good said fed steers will average $108 per cwt to $128/cwt for the year. That's up from $109/cwt in 2020. Values will trend up as the year progresses, with the fourth quarter bringing the market to its highest levels.

"We will still see lows in the fall run, but they will be less pronounced in the long-term average, and we will see a nice rally into the end of the year," he said. "We can see 10 cents to 15 cents higher than a year ago in the fall run, depending on the back end of the fed board."

Good said producers will see $135/cwt to $160/cwt on 800-pound steers -- again with prices moving seasonally higher as the end of the year nears. On 550-pound steers, the average range will be $160/cwt to $180/cwt.

Utility cows will hold up well, he added, with average price ranges of $52/cwt to $72/cwt. Good noted these girls will be a bigger part of the check moving forward. Bred cow values will also be good, with an average of $1,200 to $1,900.

FEED AND HAY OUTLOOK

Equally as important as cattle prices will be input costs -- of which feed continues to be a concern as commodity prices edge higher.

Mike Murphy, vice president of research and risk management services at CattleFax, looked at three key segments affecting corn use: feed/residuals, ethanol and exports. He said the industry expects to have a record number of cattle continue to be on feed for most of 2021, but less corn will be used in the pork industry. He said residuals will likely be tighter. On ethanol, he said projections now are for 4.95 billion bushels to be blended into gasoline, but that number could easily move higher if the economy opens up and more people begin to drive on a daily basis and take trips. As for exports, he said it comes down to China.

"We agree with the USDA forecast," he said. "When we look at the Chinese numbers, especially their commitments of 700 million bushels they will accept from us, we believe this will come true. We don't think they will back down. They are continuing to rebuild their pork industry, and they will utilize higher-quality feed. They've become a more corporate, efficient industry, and as they rebuild after ASF, they are focused more on high-quality feed, which means they will need corn. We have the supply, and price doesn't matter as much for them, as they are making over $300 per head on those hogs right now."

Looking at acreage projections, Murphy said they are looking at 93 million acres of corn with yields at 178.5 bushels per acre. At those planting and yield numbers, the 2021-22 corn stocks-to-use ratio will be around 14.1%.

Acreage projects for soybeans are at 89 million and 50.6 bushels per acre average yields. Murphy said that, with demand constant, stocks-to-use levels for soybeans could drop into negative territory, ranging from -1.0% to 0.9%.

"There's little to no improvement when it comes to stocks-to-use ratios for this market," he said of soybeans. "Either we buy more acres back or take the price up enough, so the demand is less for the 2021-22 marketing year."

As for hay, Murphy noted there are significant regional differences, with prices elevated from the Central Plains moving West due to drought. From Missouri to the Southeast, however, more forage availability will give producers more ability to manage input costs.

Victoria Myers can be reached at vicki.myers@dtn.com

Follow her on Twitter @myersPF

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