Will rapid beef expansion persist?Will rapid beef expansion persist?
August 14, 2015
WITH pastures and grassland restored in most of the country and the feeling that feed prices will remain moderate, the largest beef cow herd expansion in 25 years is off to a fast start, Purdue University agricultural economist Chris Hurt said.
As of July 1, the number of U.S. beef cows was up 2.5%, according to the U.S. Department of Agriculture's producer survey, but Hurt believes a more rapid expansion is likely in the coming year based on the beef replacement heifer numbers.
USDA reported beef heifer retention in January up 4%, but the recent midyear cattle update revealed that heifer retention is now 7% higher than year-ago levels.
According to Hurt, early indicators are for a rapid expansion.
One way to measure the rate of expansion is to observe the number of heifers being retained as a percentage of the beef cow herd. During the 1990-95 expansion, that number peaked just above 16% and remained at that rate for three years. The midyear USDA data showed that the current expansion has already accelerated to the 16% rate.
"While expansion on the new cattle production cycle has launched out of the gate, the question of how long it will persist will be determined over the next two to four years," Hurt said.
Ultimately, abundant grass, low feed prices, record cattle prices and a rosy outlook combined to entice producers into expansion, he explained.
Heavy retention of heifers in the last year is one of the factors that reduced beef supplies and led to record-high beef prices. While beef supplies were down about 6% in the last half of 2014 and about 4% in the first half of 2015, Hurt said supplies are expected to shift toward 1% growth in the second half of 2015 and a more significant 4% in 2016.
"Higher beef supplies in coming months and the sharp increase in pork and chicken supplies likely mean that peak beef prices on this cycle have already passed," he said.
Finished cattle prices dropped below year-earlier prices in late June and continued to drop to $145/cwt. by the end of July. Decreasing prices from early spring into the end of summer is the normal seasonal pattern, but Hurt said the drop has been larger this year, falling from a spring high of $167/cwt. in early April.
Additionally, futures markets have been surprisingly negative, he said.
Using futures to forecast forward-finished cattle prices, Hurt suggested that prices will recover into the very low $150s by late this year, average in the higher $140s in the first quarter of 2016 and average in the mid $140s in the second quarter of 2016. From there, he said prices are expected to fall to the lower $140s by next summer due to growing beef supplies.
Lower finished cattle prices will also put pressure on calf prices, he noted.
"Overall, calf prices are expected to continue to provide profitable returns for cow/calf operations in 2016. However, the profit stimulus to expand cow numbers is not likely to be nearly as strong as it was in the past 12 months," Hurt said. "For these reasons, the rapid movement toward beef cow expansion that has been experienced in the past 12 months will likely slow."
This means the rapid rate of heifer retention may not continue through 2016, Hurt suggested, and "if so, the multiyear persistence of expansion experienced during 1990 to 1995 will likely be shorter for this cycle."
A new report from the Rabobank Food & Agribusiness Research & Advisory group — "Beef Cow Repopulation: The Case for Diversification" — suggests that the location of the U.S. cow herd will be considerably different compared to before the 2011 drought.
The report, co-authored by senior Rabobank analysts Sterling Liddell and Don Close, suggests that the geographic distribution of the U.S. cow/calf herd in the next four to six years will be more concentrated, shifting away from a dispersed population to one that is in areas not typically associated with heavy cow/calf production. This shift will create an opportunity for new winners to emerge and will challenge historical models of calf production, feeder acquisition and crop-producing businesses.
"The initial growth phase will be relatively quick and will flatten out," Close said. "We are going to see the process happen in two phases and in different geographies than we would have a few years ago. The excess capacity in the Southwest and High Plains will fill out first. Once that area has repopulated, rebuilding will occur in the Central U.S. — mainly the Dakotas and into the Corn Belt."
The combination of the Southwest and High Plains repopulating to conventional levels plus the addition of confined and semiconfined cow/calf units in the row crop-producing regions of the Central U.S. will lead to a unified, central states cow herd, Close said.
Liddell said he believes the addition of the Corn Belt states and Dakotas to the conventional cow/calf areas will bring the U.S. cow herd back to pre-drought levels.
"Although it will depend on factors such as exports and weather, I expect a total of 3.5-4.0 million head more than the 2014 low of 29 million beef cows," Liddell said. "Of that total, 1.7 million head will come from newly developed capacity in the Central U.S. — areas typically focused on row crop production."
August live cattle futures were mixed last week. Nearby contracts closed higher on Monday at $150.25/cwt. but fell during the week to close only slightly higher on Thursday at $148.85/cwt.
August feeder cattle futures were also mixed. Nearby contracts closed higher last Monday at $214.25/cwt. but fell Tuesday and Wednesday. Most of the losses were recovered Thursday, however, and August futures closed at $214.025/cwt.
The Choice beef cutout was up almost 10 cents from the prior week, closing at $245.09/cwt. last Thursday. The Select beef cutout, despite closing slightly lower last Thursday at $235.13/cwt., was also higher than the previous week.
August lean hog contracts were lower week over week. Nearby contracts settled lower last Monday at $76.65/cwt., but the market turned upward to close at $78.625/cwt. on Thursday.
Hogs delivered to the western Corn Belt last Thursday were higher than the week before at $76.65/cwt.
Pork cutout values were mostly higher last week. Wholesale pork cutout values finished lower last Thursday at $89.42/cwt. but were up slightly from the previous week's close of $84.00/cwt. Loins finished higher at $89.15/cwt. Hams closed higher at $67.31/cwt., and pork bellies continued to climb, despite closing lower Thursday at $170.01/cwt.
In the poultry markets, the Georgia dock was unchanged at $1.155/lb. last Wednesday. Breast meat increased to $1.93/lb. Leg quarters were slightly higher at 45.5 cents/lb., and wings decreased to $1.63/lb.
According to USDA, California and regional egg prices were steady, with a steady to lower undertone. Offerings were moderate in most areas but moderate to heavy in the Midwest and light to moderate in California. Supplies were light to heavy, with light to fairly good demand.
Compared with the previous week, large eggs delivered to the Northeast increased from $2.54-2.58 to $2.65-2.69/doz., eggs delivered to the Southeast increased from $2.70-2.73 to $2.81-2.84/doz., eggs delivered to the Midwest increased from $2.59-2.62 to $2.69-2.72/doz. and large eggs delivered to California were unchanged at $3.61/doz.
The turkey markets were steady to firm last week, with offering prices trending very light to light on light to fair demand. Prices for hens and toms were slightly higher last Thursday, at $1.24-1.31/lb. and $1.24-1.34/lb., respectively.
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