Cattle Market Outlook

Ranchers Show Their Spirit as Expansion Continues

Victoria G Myers
By  Victoria G. Myers , Progressive Farmer Senior Editor
Cattle producers have to look harder for opportunities to maximize returns now, but they're out there.(DTN/Progressive Farmer photo by Robert Lagerstrom)

The long shadow 2014 left over the cattle market is proving hard to get away from. Three years later, analysts still refer to that season, cattlemen can't help but compare prices to it and expanding herd numbers build on the historically low bar set then.

This season, it's back to what Derrell Peel calls "the real cattle business." The Oklahoma State University cattle market analyst says producers can make money in this environment, but those profits will come with challenges.

"By historical standards, we aren't in bad shape," he says. "Really, 2014 was the anomaly. What we have now is the reality, where people make money over time through management."

During that anomaly of a year, average prices for feeder steers (Oklahoma City) topped out around $2.34 per pound in the fourth quarter. Average for the year came in at $2.03 per pound. The good times held up through most of 2015, as well, with a yearly average price of $2.02. By 2016, though, season averages had dropped more than 50 cents, to $1.42. Look for 2017 to be more of the same, in a market that analysts are describing as "sideways."

Almost always the biggest economic variable for cattle operations, feed costs will be the first place many producers look when it comes time to tighten spending, Peel says. "Obviously, we have to maintain nutrition to have productivity, but there is always room to improve.

"Where do you get the energy and the protein the herd needs? Go back to basics and figure out how to maintain nutrition and reproduction at the best possible price," he stresses. "For some, that means doing a better job of grazing management and reducing use of hay. Let that cow be a harvesting machine. Every day she does the work, and not the hay equipment, you are saving money."

Rebuilding Persists. Part of the economic management plan for cattle producers across much of the country continues to be a larger herd. What they may be losing in cents per pound they can make up for in quantity. The key is having forages to support reproduction and growth.

As a whole, America's ranchers boosted cattle and calf numbers by 2%, to 93.58 million head by January 2017. A few states marked losses, some held even. But on the whole, there appears to be a sentiment that more is better—at least for now.

This course is especially common in the Southern Plains, where between January 2016 and January 2017, producers added 810,000 head of cattle and calves to their holdings. It's growth best described as "rebuilding," not expansion. Texas marked the largest increase, with 500,000 additional head in just 12 months, to 12.3 million cattle and calves. Even with that 4% increase, the state is 600,000 to 700,000 head below average herd size after drought-driven liquidations going all the way back to 2006.

Recent wildfires across parts of Colorado, Kansas, Oklahoma and Texas, while devastating to those impacted, won't change the big picture when it comes to herd rebuilding in the cattle industry. "The land itself will recover quickly," Peel notes. "For those operations impacted, these are huge losses. But when you consider stocking rates in this part of the world, it's unlikely these losses will change the overall trend toward growth."

Slowdown Coming.

By 2018, the market analystbelieves herd growth will hit enough headwinds to slow or completely stop. So far, though, Peel says the market hasn't sent a strong enough message to get anyone's attention judging by the number of females currently in herds.

Consider beef replacements in the herd expected to calve this year. USDA set this at 4 million head in its January 2017 report, a 2% increase over January 2016 levels. There are significantly more heifers in the beef herd, as well—6.42 million this year compared to 6.34 million last season. That may signal additional growth into the fall.

"We've not seen a price-based market signal to put on the brakes yet," Peel says. "Certainly, we've seen an adjustment, but these are not bad prices. Plus, remember, you don't stop and start this industry on a dime. It takes a year to a year and a half to see the result of a shift in the market at the producer level."

Market Opportunities.

Nebraska cattleman Bo Fanning is positioning his family's operation for better prices by working through a marketing program, Top Dollar Angus. It's a move he hopes will help him attain a higher overall price for his beef, regardless of where the market goes in the months ahead.

Fanning sells about 500 head of commercial, straight Black Angus calves every year. The weaned and vaccinated steers and heifers are born between March and May. The producer, based on the southwest side of the state, says in past years, he's called different feedlots and tried to find the top market himself. Working through Top Dollar Angus, he's letting someone else play that role for the first time this year.

His 2016 calves sold earlier this year and averaged in the top 12% for the Angus breed in carcass and growth traits. Through the marketing group, Fanning received $1.30 per pound on 890-pound steers and $1.27 per pound on 850-pound heifers. Fanning says he was surprised their calves ranked so high in Top Dollar's program the first time out, adding he believes they can do even better going forward.

"In the past, I don't think we got all we could selling these cattle ourselves," he says. "For our quality, we should have been getting more of a premium. Now, I feel we have a group negotiating for us, and we are coming out better financially."

The family's cattle-breeding program focuses on high-growth bulls with good carcass, rib eye and marbling, and a good $B (Beef Value) rating. An Angus breed's index, $B is a multitrait genetic selection tool for feedlot and carcass merit. It uses grid and feedlot values to represent average dollar-per-head differences in progeny postweaning performance and carcass value compared to progeny of other sires.

Top Dollar Angus, founded by J. Tom Brink in 2013, sold its first calves in 2015, a total of 3,300 head. Last year, the group marketed about 13,000 animals for producers. Participation in the program is tied to genetics that rank high for carcass and growth traits valued by feedlots. Producers pay an annual herd enrollment fee of $250 plus $4 per head for each animal marketed.

Kenny Stauffer, general manager of Top Dollar Angus, says the Fannings qualified for the program based on sire genetics. To participate, producers must have two or more generations of Angus (Red or Black) genetics with growth and carcass traits ranking in the top 25% of the breed based on documented historical sire use. Another way to qualify is by DNA evaluation. Through 2016, Stauffer says Top Dollar Angus averaged a little more than a $24-per-head premium across all sales.

Prices Through 2017. Analysts are expecting to see more seasonal price fluctuations this year as opposed to all-out volatility. Part of the reason for the calmer outlook is improvement in price discovery on the cash market.

Don Close, Rabobank vice president for animal proteins, notes last year, producers and feeders got the message price transparency was an issue. It became clear the industry needed to create more sales volume in the open market.

Last fall, an online weekly sale, the Fed Cattle Exchange by Superior Livestock Auction, began to help improve conditions. The sale gives the cattle industry live transactions each week to help determine average cash prices for market-ready fed cattle. USDA began to include these weekly transactions in national and regional direct-negotiated slaughter cattle reports in October 2016.

"While the Fed Cattle Exchange is not trading big volumes, they are having auctions on Wednesdays, and there is total transparency of that trade. Since this exchange started, it has clearly set the tone for the cash market for the remainder of the week," Close says.

Peel agrees, adding: "Last year, we saw improvement in cash trades, particularly in the Southern Plains. Some of the improvement was a function of changing market conditions, but Superior's Fed Cattle Exchange, in terms of a weekly cash market online auction for fed cattle, provided an important and increasingly useful benchmark."

Based on current conditions, Close and Peel's price outlooks for the remainder of 2017 are similar. Peel, attributing his outlook to the Livestock Marketing Information Center's (LMIC) consensus forecast, says ultimately, this will be a sideways market going forward. Rabobank's Close says by May, with the arrival of a new crop of calves, prices will begin to decline from first-quarter levels.

Fed cattle the first quarter of 2017 are expected to have ranged between $1.10 and $1.20 per pound based on current conditions at press time. Typically, prices in the second quarter are higher, but Close believes this year will be counterseasonal.

"For the second quarter, we are looking at $1.08 to $1.18 per pound," he says. "By the third quarter, we see 90 cents to $1.05 a pound—a steep drop and more than the normal seasonal decline. I am not only anticipating a strong supply of fed cattle coming to market, but I am giving consideration to two mega pork plants expected to come online this summer. That will increase total available supplies of protein in the marketplace."

For the fourth quarter, Close has a range of 98 cents to $1.10 per pound, marking a typical 7% increase from third-quarter lows to the fourth quarter. This is the year feeders and stocker/backgrounders get their turn at profits, Close notes. Cow/calf producers won't see much above $1.20 to $1.60 for the rest of the year.

Watch For Opportunities. Josh Maples, livestock Extension economist at Mississippi State University, agrees there's not much upside for cattle prices this year. He stresses the importance of minimizing costs now and believes value-added programs will be important for cow/calf producers in his area. He also predicts there will be moments of opportunity to watch for.

"There will be times when prices tick up, and being an opportunistic seller will be important," Maples says. One area of opportunity for those with the available forage, he adds, may be keeping calves longer.

"I do think it's going to be a good year to add value with those extra pounds," he notes. "It all depends on time of year. Late summer and early fall, a lot of cattle head to the feedlots. I worry about cattle prices then."

Hope In Exports

Maples says of all the elements in this year's market that will affect prices, he believes trade has the potential to make the biggest impact. If 2016 export levels hold, U.S. beef appears well-positioned.

Last year's big three when it came to export destinations for U.S. beef were Mexico, Japan and South Korea. Last year, U.S. beef exports finished the season 11% above year-earlier levels. Sales were up to Japan (+19%), South Korea (+38%), Taiwan (+23%), Vietnam (+44%) and Mexico (+8%).

Exchange rates and possible renegotiations of long-standing trade agreements like the North American Free Trade Agreement (NAFTA) have many in the industry on edge. For beef, the loss of the long-worked-for Trans-Pacific Partnership (TPP) after President Donald Trump's election was a bitter disappointment. The administration withdrew from the accord with 11 nations, calling the decision a "great thing for the American worker."

The National Cattlemen's Beef Association (NCBA) notes: "Foreign trade has been one of the greatest success stories in the long history of the U.S. beef industry." The group says U.S. beef is losing $400,000 in sales every day they don't have TPP. As for NAFTA, NCBA reports since its implementation in 1994, exports of American-produced beef to Mexico have grown more than 750%.

Rabobank's Close says they are following trade issues closely. He calls the loss of TPP a "disappointment," noting that a tremendous amount of energy and political capital was spent to get that negotiation where it was only to back away.

"We don't know what the Plan B is," he adds. "There are some discussions under way to create a bilateral agreement with Japan and negotiate those beef tariffs to a competitive level—comparable to what they negotiated with Australia a few years ago. But, we really don't know what the administration will do."

As for NAFTA, he believes a case could be made for updating it but questions if that can happen while keeping the core agreement in place. "For the beef industry, NAFTA has become so ingrained, it would be difficult to see it unravel," he adds.

Close credits some of the high export numbers for U.S. beef to gained market share against Australia, where drought during 2012, 2013 and 2014 shortened supplies and pushed up domestic prices. This situation could reset itself as Australia builds back herds, and the value of the dollar continues to increase.

"There is a lot of chatter over the strength of the dollar and the Trump bump, and a likely increase in interest rates," Close adds. "It's important to note the dollar is just barely above long-term historical averages. It's not that it's so high today, but that it was abnormally low the last three to four years. If you take the decline we've seen in wholesale beef prices the last 18 to 24 months, it has largely compensated for any currency costs."

Going into 2017, Close believes U.S. beef may be on pace to set a record in exports. "Historically, the U.S. has never exceeded 10% of production in exports. In 2016, we ended up at 10.1%. So, we were at the barrier, and we are at a pace for 2017 where we may break through that ceiling. I think there is a very real chance."

(AG)

Victoria Myers