LIVESTOCK MARKETS: Fear, uncertainty plague cattle markets

Long-term trend of lower cattle prices to likely continue into 2017.

The beef industry's transition to larger beef supplies in 2016 has been challenging. According to Oklahoma State University Extension livestock marketing specialist Derrell Peel, a persistently bearish psychology and ridiculous volatility in live and feeder cattle futures recently contributed to a meltdown in cash markets and a mood among producers that is best described as fear. As a result, some producers — as well as some lenders — seem unable to do much of anything at this time, he added.

“There seems to be a fear that that there is no bottom to markets once the cow herd expands and beef production starts to rise," Peel said. "Perhaps the fact that the industry has not experienced a cyclical expansion since the early 1990s is part of the problem.”

Peel explained that some younger producers and traders have never participated in herd expansion, since no one in the industry has in more than 20 years. As such, he said there seems to be a feeling that any industry data with a positive year-over-year change is cause for rampant bearishness.

“A little perspective is in order,” he stated. “The beef cow herd is probably still expanding in 2016.”

There is no way to be sure of this, however, since the U.S. Department of Agriculture's National Agricultural Statistics Service has not provided any inventory update since January. Nevertheless, Peel said the beef cow herd is expected to grow another 1.5-2.5% in 2016. When added to the expansions in 2014 and 2015, the Jan. 1, 2017, beef cow herd inventory is likely to be near 31 million head.

“This puts the beef cow herd inventory back to the level at the beginning of 2011 — before drought liquidation dropped the herd by an unplanned 2 million head,” he noted. “Although the expansion since 2014 is properly characterized as cyclical expansion, it can also be thought of drought recovery, so far.”

According to Peel, there is little doubt that the herd was poised to expand in 2011 in the absence of drought, so it hardly seems likely that expansion to get back to that level can be thought of as drastically overshooting the mark. The sharp jump in steer carcass weights recently (increasing 28 lb. from 2013 to 2015) means that it will take less expansion now to produce the total level of beef production required, and the need for additional herd expansion in 2017 and 2018 is questionable, but the expansion thus far is not too much, he said.

Beef production in 2016 is expected to increase 4.5-5.0% year over year. This follows a 7.9% decrease in production from 2013 to 2015 to hit a 22-year low. Beef production in 2016 is projected to be about 24.8 billion lb. and, despite the year-over-year increase, is still 4.7% below the average production level for 2009-13. Peel pointed out that domestic and international demand growth in the next couple of years will determine what level of beef production is needed, but it's clear that we are not at that level yet.

Peel believes there is reason for cattle and beef markets to stabilize. Current cattle carcass weights are down 15 lb. from this time last year and are expected to remain below year-earlier levels for the balance of 2016. Year-over-year cattle slaughter rates for the rest of 2016 will still be higher than last year but will moderate. These rates, combined with reduced carcass weights, are expected to hold fourth-quarter beef production to a year-over-year increase of less than 3%, compared to the 7.4% increase in the third quarter.

Beef imports are down (12.1% less through July), and beef exports are improving (up 3.1% through July), thus moderating beef supply increases in domestic markets. According to Peel, this is expected to hold the 2016 domestic beef consumption year-over-year increase to less than 2%.

Fewer cattle are also being imported from both Mexico and Canada this year, with feeder cattle imports from Mexico down roughly 25% so far this year. “This helps moderate the increase in domestic feeder supplies going into 2017," he said. "The market shock absorbers are in place and working and should help cattle and beef markets move forward with much less drama compared to the past few months.”

The supply challenges going forward mean that caution on the part of producers and lenders is advised and warranted, Peel said. However, he added that the growth in cattle inventories and beef production so far does not constitute a wreck. Paralyzing fear that cripples decision-making may prevent producers from taking advantage of opportunities that inevitably exist in changing market conditions, he noted.

“We've been through this before — just not in a long time,” Peel said.

Beef prices likely to stay low

Beef cattle prices will likely continue to decline, Texas A&M AgriLife Extension Service economist Dr. David Anderson said, adding that he expects the long-term trend of lower cattle prices to continue into 2017.

Anderson said there could be an uptick in fed cattle prices during the fall, which is especially typical around the holidays, when specific cuts are in higher demand, but the highest prices for the year are now behind producers.

“Producers have held back more heifers looking to expand herds, and we're seeing the effects of more cattle,” he said.

Cash prices for fed cattle last week were at around $1.04/lb. compared to $1.20/lb. at the same time last year and the five-year average of $1.25/lb., he said.

Anderson said the lower beef prices weren't atypical among meat producers in general. In the first half of 2016, a record amount of pork, poultry, turkey and beef were produced in the U.S., which translated into lower prices across the board.

“That was weighing prices down some, because consumers had more choices,” he explained. “There's also less processing capacity to handle higher numbers of cattle, so I think that is contributing to the overall decline in prices as well.”

Good available forage and lower feed prices are helping offset prices in the calf market, Anderson said. August rains have left range and pasturelands in good shape, and Texas produced record corn and sorghum crops, which could affect the market as well, he said.

Market recap

October fed cattle futures recovered losses most of the week after closing at a low of $98.90/cwt. last Friday. Nearby contracts closed higher Monday at $98.925/cwt. and continued to climb through Wednesday’s higher close of $102.85/cwt. The rally ended Thursday when October contracts closed lower at $102.425/cwt.

October feeder cattle futures rallied this week, as well. Nearby contracts closed higher Monday and Tuesday at $123.975/cwt. and $128/cwt., respectively. They closed lower on Wednesday, but finished Thursday higher at $127.825/cwt.

For the beef cutouts this week, Choice and Select closed lower at $183.48/cwt. and $175.06/cwt., respectively.

October lean hog futures fell most of the week, but were able to recover the losses and post some gains by Thursday’s close. Nearby contracts closed lower Wednesday at $48.225/cwt., but finished higher Thursday at $50.375/cwt.

Pork cutout values were lower this week. The wholesale pork cutout decreased to $72.16/cwt. Loins were lower at $78.84/cwt. while hams were higher at $49.26/cwt. Bellies climbed to $108.55/cwt.

Hogs delivered to the western Corn Belt were lower this week, closing at $47.21/cwt. on Thursday.

In the poultry markets, the Georgia dock was unchanged Wednesday at $1.10/lb. Breast meat was lower at $1.555/lb., while leg quarters were higher at 31 cents/lb. Wings were slightly higher at $1.535/lb.

According to USDA, egg prices have been steady, with a steady to lower undertone. Offerings and supplies have been moderate to heavy. Demand has been light to heavy.

Large eggs delivered to the Northeast were lower at 50-54 cents/doz. Prices in the Southeast and Midwest were also lower at 56-69  cents/doz. and 42-45 cents/doz. Large eggs delivered to California were lower at $1.10/doz.

For turkeys, USDA said the hen market has been steady to firm. The market on toms has been steady. Offerings and demand have been light. Prices for hens decreased to $1.16-1.28/lb., while prices for toms were unchanged at $1.14-1.28/lb.

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