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Let more good times roll In the beef business

What more can be said about this cattle market? It’s in the stratosphere: Market-ready choice steers over $1,600 a head; good lightweight feeder calves $1,000; even cull cows near $1 a pound!

Those phenomenal prices aren’t going away anytime soon. That is the message from the experts at CattleFax, the market research firm that gave their traditional outlook presentation at the Cattle Industry Convention this week. These good prices – $1.25 a pound liveweight for market steers, and $1.80 for feeder calves – will be with us for maybe two more years. Here are the highlights from CattleFax.

Weather outlook

The patterns are shifting, says Art Douglas, CattleFax’ weather consultant. “We’re going from La Nina last year to El Nino (warmer Pacific temps) this year,” he says. That means the winter will continue warm, with more recurring precipitation events. Even Texas, parched last year, is going to get it, except maybe in its panhandle region.

The summer weather pattern in the Midwest is shaping up to be like 2006 and 2009, Douglas says, and that means cool and wet. That should give a decent start to the corn-growing season, with the possibility of some delays from the coolness. 

Corn outlook

Mike Murphy of CattleFax staff says corn futures prices in the first half of 2012 will find upper resistance at $6.50 to $6.75 a bushel, and support about $1 under that. “If the spring is wet and cool, as Art says, we could put some anxiety in the market that will push it through that upper resistance,” Murphy says.

Ethanol production last year was up 6%, and burned through 5 billion bushels of corn. Exports of ethanol, up 200% last year, are now a driving force in that market. Ethanol demand this year may increase a little, to 5.1 billion bushels.

Murphy expects corn acreage this year to be 94 million acres, up 2 million from last year. Some of that will come at the expense of soybeans, which will fall to 74.5 million acres. The corn market continues to favor it over beans. “If the spring is cool and wet, some acres could end up getting switched to beans.”

In the second half of 2012, he expects corn to hit resistance at $6.25 to $6.50 a bushel, and find support at $5 to $5.25. “We still have a small stocks-to-use ration, and it’s going to take some time to get things back into balance,” Murphy says.

Beef exports and general demand

At $6.9 billion last year, exports added $261 a head to the value of fed cattle. That will likely increase again in 2012 to 3 billion pounds of exported beef. But, says Brett Stuart of CattleFax, there’s a caution flag: Beef prices on a global scale are up 20% each of the last two years. Are we going to get priced out of new demand? He doesn’t think so, as most of the new demand is from Asian markets, with has the bulk of the world’s population. And they are beef-deficit. 

Domestically, as fast-food burgers take a growing slice of beef demand, we just about can’t find enough grinding beef. The price for beef shoulder chucks and trimming beef has increased by 40% to 50% in recent years, faster than other cuts. Similarly, cull cow prices are tied to hamburger demand and the increase in fed cattle prices.

Cattle supplies

The recent government cattle inventory report showed us down another million head in the last year, to about 91 million. Beef cow numbers were down a million head, with most of that coming in the southern Plains due to drought. Cow numbers may finally be increasing in the northern U.S., where feed supplies are ample, says Kevin Good of CattleFax.

The result of the overall reduced numbers is that calf prices will increase another 15% in 2012, as feedlots compete to keep pens full. Feeders placed a lot of calves early into feedlots last year, because of drought and demand, and that will catch up with us soon. There are about 2 million fewer feeder calves available now, says Good.

This situation is going to put a lot of pressure on packing plants to stay busy, says Good. “By 2013, we’re going to have about 8,500 fewer animals a day for slaughter, compared to 2011. The packing industry will have to contract.” Some of that reduction in beef supplies may be cushioned by longer feeding periods and heavier slaughter weights. A good corn crop this year with prices ratcheting down by $1 a bushel would support longer stays in the feedlot.

The bottom line is that beef supplies will be down 2% this year, and another 4% next year. “It sets up a friendly, bullish outlook for beef markets over the next two years,” Good summarizes. 

Beef demand and cattle prices

Last year, cattle prices were up 20%. Wholesale beef prices were up about 15%, and retail was up 10%. We keep passing those prices up the chain, but they don’t move nearly as fast at retail as they do at farm level, because wholesalers and retailers don’t like quick moves. But make no mistake, these high prices will eventually make it all the way to consumers. “When will they say, ‘enough is enough?’ “ Kevin Good asks. “Can we keep passing these prices on? We’re going to really test that this year,” he predicts. 

With flat beef demand and declining supplies in 2012, he predicts that fed cattle markets will average $1.22 a pound this year. Tops will be at about $1.32, and support will be at $1.10.  “That range represents about $300 of value per animal, from low to high,” he says. “That’s a lot of dollars at risk for cattle feeders.”

He thinks 550-pound feeder calves will average $1.75 this year, an increase of $157 a head over last year. Cull cows will be up 10¢ a pound over last year, to 80¢, with a chance to hit near $1 a pound at times. Good young bred cows could be $1,500 to $2,000. “The old rule is that a bred cow is worth about double the calf value,” says Good. “Well, weaned calves will be worth close to $1,000; $2,000 for the cow is about right.”

Bottom line is that feedlot margins will be very tight or negative in 2012; stocker operators might be profitable but definitely squeezed from last year; and cow-calf operators are in the driver’s seat, says Good. “Record high prices for their calves will more than offset higher input costs.”

Needed: 4 million more cows

CattleFax’ CEO Randy Blach says, in summary, that the market is definitely sending an “expand” signal to beef producers. “We’d be expanding now if not for the drought,” he says. “The economic signal to expand is just not enough to overpower the drought yet. But believe me, it will. Do you think that $250-$300 a head calf profits will send the expand signal?

“Don’t doubt for a minute that it will, and we’ll expand this cow herd. We’re going to need at least 3 million to 4 million more cows in this country over the next decade, just to keep up with rising world population and demand. And that’s if we just maintain our current market share.” 

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