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Cattle Herd Expansion Steams Ahead

Cattle herd expansion is on in a big way.

Friday's USDA Cattle Inventory Report showed the beef breeding herd's getting bigger, most notably in the number of heifers held back to calve this year; the report showed a 7.3% increase in that sector of the business, a sign that this year will be one of "much bigger expansion than expected," Allendale market analyst Jim McCormick said late last week. While that expansion is driven by strong consumer demand, developing market factors likely make the next year "a time of caution for beef market participants," says Purdue University Extension livestock economist Chris Hurt.

First off, as USDA's Friday report shows, cattle farmers are upping numbers big-time. Profit margins are such that expansion is certainly been warranted for the last few months, and that is just the beginning, Hurt says; the expansion underway -- in which cheap feed and other factors have encouraged a 1% increase in the overall cow and calf herd, the first annual increase in eight years -- is likely to last a while.

"While producers expanded cow numbers more than expected in 2014, the expansion of the beef herd is likely to continue for multiple years. It is common for the beef herd to be in expansion for four to six years," Hurt says. "With 2014 registering as the first year of expansion, expansion could continue through most of this decade. If so, peak beef production on this cycle would not be expected until early in the next decade."

Though market prices are high right now, the supplies partially driving those prices may not slide into the remainder of this year, as USDA projected earlier. Still, look for a 1% to 2% dip in total inventory.

"Beef supplies in 2015 may not be down as much as the nearly 2% USDA has been anticipating due to the larger calf crop and to anticipated heavier marketing weights this year. Most recently, in December and January, marketing weights have been up 1% to 2%," Hurt says. "With feed prices in 2015 expected to be the lowest in five years, those higher weights will likely continue."

Prices ranging from $150 to $155/CWT for finished cattle will help sustain beef profits for farmers through the year, Hurt adds, but there are other factors that could tilt the balance toward the bears as the year progresses, namely rising competition from other livestock sectors. Still other factors like general consumer prices for things like fuel will help keep a floor underneath any potential erosion of beef profits heading into late 2015 and beyond.

"Beef will face strong competition from higher supplies of competitive meats in 2015, where poultry supplies could be 3% higher and pork 4% to 5% higher. On the other hand, beef demand should benefit from moderate growth in consumer incomes and from lower fuel prices," Hurt says. "Given the uncertainties in the U.S. and world economies, concerns about commodity deflation, an unusually high priced year in 2014, and a period of rapidly rising competitive meat supplies, it seems like a time of caution for beef market participants."

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