Basic fundamentals to play out in 2016 cattle market

Expansion to hinge on cow/calf returns and weather conditions.

University of Nebraska-Lincoln assistant professor Kate Brooks said the last two years have been a whirlwind of dramatic extremes for the cattle industry. With historically tight supplies in 2014, record prices in every segment of the market were reached.

Improvements in drought conditions and unprecedented high cow/calf returns also brought about rapid expansion at the end of 2014 and throughout 2015, she said.

Cattle numbers and beef production continued to be historically small in 2015. In fact, the December U.S. Department of Agriculture “World Agricultural Supply & Demand Estimates” (WASDE) report estimated 2015 beef production at 23.7 billion lb., the lowest annul beef production number since 1993. 

“This past year, producers faced major volatility in prices due to any disruption to supply, whether positive or negative, causing large price fluctuations,” Brooks said. “Prices in the first quarter of 2015 started higher than 2014, but significant declines brought them back closer to 2013 price levels in the second half of 2015.”

So, what’s in store for 2006? While nothing is certain in the cattle industry, Brooks said there are some key factors worth mentioning for 2016 and beyond.

Evidence has been pointing to a rapidly paced expansion in 2015 because there are fewer heifers entering the feedyard, as well as fewer cull cows going to market, Brooks noted.

“The Jan. 1 'Cattle Inventory' report will be released on Jan. 29 and will set the stage for 2016,” she said.

According to Brooks, two factors will contribute to or hinder further expansion in 2016: cow/calf returns based on feeder cattle prices and weather conditions. 

Current Livestock Marketing Information Center estimates suggest lower cow/calf returns in 2016, with returns over cash costs plus pasture rent near $200 per cow.

Drought conditions have continued to improve over most of cow/calf country, Brooks said, adding that continued improvements would contribute to expansion in 2016. However, she said any formations of drought could rapidly slow the pace.

“Expansion equates to more beef production in 2016, 2017 and 2018, which also means lower prices,” Brooks noted.

The December WASDE report estimates that 2016 beef production will be more than 24.7 billion lb. Larger carcass weights will also contribute to increased beef production; however, due to reduced feedlot placements recently, beef production will be constrained for the first part of 2016, she said.

“Beef production in 2016 will be higher than 2014 and 2015 but will still be historically low,” Brooks added.

The export market was challenging in 2015, and there don’t appear to be significant changes to improve the export market in 2016, according to Brooks.

“The continued high-priced beef, coupled with the strengthening U.S. dollar and lower purchasing power of major markets, has played a big factor in the export market and will continue to dampen it for 2016,” she said.

While the import market was strong in 2015, Brooks said beef imports in 2016 will likely be lower.

She said Australia has seen a decline in its herd numbers and is recovering from drought. As such, herd expansion will reduce beef imports for the country in 2016.

“Domestic demand remained relatively good through 2015 but will be an important figure to watch as we move through 2016,” Brooks noted.

Increased supplies of beef, pork and poultry are expected in 2016, but up only about 2% over 2015, according to the latest WASDE, with just slight increases in per capita consumption.

“Basic supply and demand fundamentals will continue to play out in 2016. Increased beef production equates to declining prices in the pipeline, unless domestic and export demand improve significantly,” Brooks said.

Besides the fundamental market factors, she said producers need to be aware of other factors that contribute to how the markets will continue to play out in the coming years. These factors include ongoing political issues, the 2016 presidential election and trade agreements, as well as consumers’ (both domestic and international) increasing interest in where and how their food is produced.

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