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Reasons for cattle market optimism

Parts of the country are still fighting drought conditions. But things have bounced back in other areas, and the resulting effects on the nation's beef sector could have some producers smiling, economists say. Though the herd won't bounce back too quickly, it's already starting to happen, and it could add a few bucks to producers' bottom lines later this year.

Herd numbers took a huge tumble a year ago when hay and forage supplies tanked because of the drought. The land has at least begun to recover in many areas, however, and resulting lower feed costs give reason to be optimistic about the reversal of a general trend that's been underway for about the last six years, says Purdue University Extension ag economist Chris Hurt.

"The beef industry is about to reverse a downward trend in numbers, but expansion is expected to start slowly. Now, prospects are brightening for a renewal of pastures and for a welcomed reduction in feed prices," Hurt says. "Pastures and ranges have returned to favorable conditions for much of the country including the Northeast, the Southeast, Midwest, and the Northern Great Plains. Improvement is also noted for the Central and Southern Plains, although drought conditions are still lingering. Texas, Oklahoma, and Kansas have received some recent rains that may help to continue the abatement of drought."

Currently, almost three-fourths of the nation's pastureland is rated in fair to excellent shape compared to less than half in those categories a year ago, Hurt adds. That's causing the market to look ahead to this fall, when feed costs could continue to slip based on what right now is largely poised to be a decent corn crop.

"Markets are currently expecting feed prices to drop sharply when new crop harvest gets underway," he says. "New crop corn prices are about $2 per bushel lower than nearby bids, and fall soybean meal prices could be as much as $200 per ton lower than current scarce old-crop offers."

The end result will start as a likely highly regionalized shift in heifer retention. The drought's far from over in parts of the southern and western Plains, so the growth will dodge those areas until conditions can improve, keeping something of a lid on the projected growth.

"The initial retention of heifers will likely occur this fall in areas primarily east of the Mississippi River, plus the Delta, the western Corn Belt, and the northern Great Plains. This is a large area that currently has 57% of the nation's beef cows," Hurt says. "The industry may see the start of heifer retention this fall, but the magnitude of expansion is expected to be low and slow to get underway. Beef cow producers know that expansion of the herd is a long-term investment, and generally want a more extended period of favorable returns before making major financial commitments. In addition, nearly one-half of the country's cows are in regions that have not yet fully emerged from the drought."

The expansion will start to influence finished cattle prices first, then eventually cause calf prices to climb. Expect finished cattle prices to remain in the low $120/CWT range before climbing into the upper $120s in the fourth quarter of this year, Hurt says. The mid-$130 range is likely by early spring 2014, and it will precede likely higher feeder cattle prices.

Yes, the prices are good news for embattled ranchers. Just don't get in too big of a hurry, Hurt says, especially considering the fact that competing products continue to pressure consumer beef sales, the ultimate driver of cattle prices.

"Prices of calves may need to move closer to $2 per pound to provide the incentive that will provide for a more major beef expansion. Both the poultry and pork industries are set to increase production rapidly as feed prices decline," Hurt says. "Retail beef prices, already at record highs, will move even higher in the coming 12 months at a time when poultry and pork price increases are moderating or even falling. This will mean stiff competition for beef among domestic and foreign consumers."

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