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Cattle Herd is Beefing Up

A Look into 2017 cattle markets.

An even bigger cattle herd is expected in 2017, according to the high rate of heifer retention indicated by the USDA January Cattle Inventory Report. Beef cow numbers grew by 3.5% in 2016, and the U.S. is expecting a substantial growth in beef production to pair with herd growth.

After many producers fell into red ink this past fall, why is there so much herd expansion? According to David Anderson, professor and Extension economist at Texas A&M, there are several reasons.

“While we don’t have record-high prices anymore, it’s those record-high prices that kicked off the growing herd,” says Anderson. “The reason we had record-high prices is the drought in the Southern Plains that forced so many cows to go to market. This forced our numbers so low.”

Lee Schulz, Iowa State University Extension livestock economist, notes that favorable forage conditions have influenced producers’ decisions to continue expansion.

Bulking up the U.S. cattle herd means a number of things for producers looking at the second and third quarter of 2017. Cash cattle have had a tremendous rally recently and some folks are even holding out for prices above the current $125/cwt. Producers are finally seeing some profitability across the board.

“We’re in a seasonal spring rally with higher fed cattle prices. Those higher fed cattle prices are pulling everything else up, as well,” says Anderson. “Some higher fed cattle prices give us some profits on the cattle feeding side, which encourages some more placements and more demand for feeder cattle. I think we see higher calf and feeder cattle prices because of that positive spring rally on the fed cattle side.”

Schulz predicts April highs for Iowa fed cattle. He predicts the first half of 2017 to cushion an average yearling to finish profit of $104.09 per head.

“The best month currently projected is April 2017 steer closeouts at a profit of $204.75 per head where April fed cattle prices on March 9 are estimated at $118.46/cwt, which is substantially higher than the $100/cwt to $112/cwt range estimated for the remainder of 2017 scheduled closeouts,” says Schulz.

During the second quarter of 2016, the fed cattle markets averaged $127.68/cwt on a five-market average. Currently, Anderson believes markets are within striking distance of that quarterly average, even if it’s a couple weeks out. He predicts fed cattle will average around $115/cwt for the second quarter of 2017.

Looking to the third quarter, Anderson foresees an average fed cattle price of about $108/cwt. Comparing prices with 2016, the fourth quarter of 2017 looks to be better than that of 2016, a welcome prediction to producers.

“The main thing to consider is that we’re still going to produce more beef in the fourth quarter this year than we did last year, but I think exports are critically important,” says Anderson.

Demand is Key

Beef production is predicted to rise by 900 million pounds, or 3.5%, from 2016 to 2017.

“I think the net change in trade year over year is going to absorb at least half of that beef,” says Anderson. “We are finding growing export markets.”

The U.S. is starting to import less and to export more as we produce more beef, according to Anderson, who believes the country is well on its way to becoming a net exporter of beef by volume. 

By expanding current export markets and finding new markets, U.S. beef exports have seen a substantial increase.

“Beef exports in 2016 were up 13% from 2015. A major increase was South Korea and Japan who imported 43% and 22% more beef, respectively,” says Schulz.

New markets, such as Brazil, are popping up for U.S. beef. The new trade agreements made with the world’s second-largest producer of beef is a step in the right direction to expand demand for U.S. beef.

The ongoing drought in Australia has indirectly boosted U.S. beef consumption overseas. Australian beef prices are on the rise, and U.S. beef prices continue to fall. Since Australian beef competes with U.S. beef on the shelves in many Asian countries, U.S. beef is now more appealing and competitive in a global market.

“We’re going to produce a record amount of meat in the U.S.,” says Anderson. “That means exports are critically important to move some of that product, or we have to eat a lot more.”

Anderson noted that 2017 will see a record amount of meat produced in the U.S., close to 100 billion pounds. The relative price changes between beef, pork, and chicken will drive demand and influence consumer choice between the three.

When will producers make money again?

After a turbulent end to 2016, many producers are hoping for a brighter 2017. The question on everyone’s mind is when will producers make money again? Schulz provided his predictions, which paints different pictures for cow/calf producers and cattle feeders.

“Cow-calf margin will likely be squeezed to near break-even levels,” says Schulz. “For stocker operations and cattle feeders, opportunities in 2017 will likely be improved compared with the red ink of the last two years.”

Schulz notes that the lowest cattle feeding break-even sales prices since 2011 in Iowa will help turn a profit in 2017.

“Using all economic costs (including the cost of the feeder animal and interest), for a typical Iowa commercial feeding situation, break-even sales prices for steers placed into a feedlot during October, November, and December of 2016 (entering the feedlot at about 750 pounds) were calculated by Iowa State University to be in the $103/cwt to $108/cwt range. If realized, those would be the lowest since the first quarter of 2011,” says Schulz.

Advice for Producers

Seasonal summer and fall lows are predicted to be even lower than in 2016. Due to a currently expanding herd and more beef than packers have seen in recent years, lower prices are likely.

While lower prices might mean red ink for some producers, anticipating when to sell and when to hold feeders makes all the difference. Anderson credits timing with profitability – or lack thereof.

“Opportunities appear and disappear as markets continue to adjust, and producers should look for chances to take advantage of those opportunities. When profitable margins present themselves, careful consideration should be paid to locking in those profits. Remember the goal of price risk management is to minimize risk by limiting losses and increasing the probability of profit,” says Schulz.

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