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Ranchers' Management Guide - September 2010

Cattle Market Challenges and Opportunities in the Coming Months

by Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist

Cattle and beef prices have recovered significantly in 2010 over 2009 levels. Prices for boxed beef and most classes of cattle are averaging 10 to 15 percent higher than last year.

Cattle producers have spent much of the time since 2007 on the defensive against a variety of market shocks that limited or erased profits in most cattle market sectors.

The recovery of prices this year has restored some profitability and has many producers evaluating the market and potential opportunities.

Domestic demand is still the key

From late 2008 through 2009, consumers tightened their belts in the recession and beef demand was reduced. Consumer spending shifted beef demand from high-value middle meats to lower-value end meats — more hamburgers and fewer steaks. At the worst of the recession in 2009 even end meat values dropped sharply.

This year, end meat values have recovered significantly, although middle meat demand is still weak. Beef demand is not the negative factor it was in 2009, but still has a long way to go to recover fully.
Beef demand will recover with the general economic recovery. The pace of beef demand recovery will be the main factor in determining how fast and how high beef and cattle prices will be for the rest of 2010 and through 2011.

Cattle and beef supply — fueling stronger prices

The supply fundamentals of the beef industry are providing support to push cattle and beef prices as high as demand will allow.

Beef production in the first half of the year was down nearly 1 percent because light carcass weights more than offset a 1.2 percent increase in cattle slaughter.

Increased carcass weights, and a slight bulge of feedlot numbers in the third quarter, will close the gap a bit, but beef production will remain below year-ago levels through the rest of 2010.

The mid-year cattle inventory numbers project yet another smaller calf crop for 2010 and an estimated feeder supply down more than 1 percent from a year ago.

Cattle slaughter will decrease significantly beginning in the fourth quarter of this year and continuing through 2011. Even though carcass weights are expected to increase next year compared to this year’s low levels, total beef production is expected to decrease more than 1.5 percent in 2011.

Moreover, cattle inventories are not expected to increase anytime soon. The latest cattle inventory estimates confirm that the cow herd continues to shrink and beef heifer retention has not begun.

Cow-calf producers may have a significant direct impact on cattle markets in the short run and the long run. At some point, cow-calf producers will likely begin retaining heifers for planned expansion. This could begin in late 2010 and into 2011.

Given the extremely tight feeder supplies, heifer retention will squeeze feeder availability and provide even more support for feeder prices in the short run.

Once expansion begins it will be at least 2 years before larger calf production will begin to increase feeder supplies. Supply fundamentals will remain very supportive for the foreseeable future, until herd expansion starts the clock on eventual increases in feeder supplies.

International trade leads the recovery

Since late 2009, international trade has provided crucial support to U.S. beef and cattle prices. Global recovery from the recession has generally been faster and stronger in developing countries compared to developed countries. This has spurred a 26 percent increase in U.S. beef exports in the first half of 2010.

Granted much of this demand is for lower-valued products, but global beef demand — like domestic demand — recovers first for low-value products with stronger high-end markets yet to come.

Export demand is stronger to most of the major U.S. beef export destinations, including Canada, South Korea and Japan, and to some traditionally smaller markets such as Russia, Vietnam and Hong Kong.

Mexico is the exception. Mexico continues as the largest U.S. beef export customer, but is down from last year. Mexico was severely impacted by the global recession and the H1N1 influenza. Beef demand remains relatively weak.

Producer prospects

As is typical in the cattle industry, the opportunities and challenges for producers depend on who you are.

With small cattle inventories supporting higher prices, the cow-calf sector is in the driver’s seat. Higher prices will generally be expressed most quickly and sharply at the cow-calf level. Cow-calf producers are expected to have profit potential, but it will depend on cost management.

There is still risk and volatility in input markets such as feed, fuel and fertilizer. Strategically, cow-calf producers are, first, stabilizing and recovering from any residual financial stress of recent years and, second, thinking about expansion possibilities in the coming months.

Evaluate and initiate plans now that will position you to take advantage of the anticipated strength in cattle markets for the next 2 to 3 years, or longer.

Stocker and feedlot producers must deal with the margin between buying and selling cattle. Tight supplies mean that purchase prices will increase more and faster than selling prices, on average, and margins will remain generally tight.

Feedlots have seen limited profitability in the first half of 2010 because the cattle market transitioned to higher levels, but have paid sharply higher feeder prices to rebuild feedlot inventories. Feedlots will see margins squeezed again before the end of the year and will continue to scramble for placements with historically tight feeder supplies.

Although feed markets do not appear to offer any immediate threats, there is always the possibility of sudden and sharp feed price volatility.

Stocker producers will likewise pay premium prices for stocker calves and must manage the buy-sell margin carefully. However, generally good forage conditions and the flexibility of forage-based production systems will provide more opportunity for stocker producers to manage margins and risk.
The cattle industry is poised to enjoy stronger markets and the opportunity for more aggressive production and marketing, with caution. Demand is improving, but it is still vulnerable and input markets are subject to unexpected turbulence.

Producers should carefully evaluate risk and maintain as much production and marketing flexibility as possible to adjust to dynamic market conditions.

Consumers tightened their belts from late 2008 through 2009. Spending shifted beef demand from high-value middle meats to lower-value end meats — more hamburgers and fewer steaks. This year, end meat values have recovered significantly, although middle meat demand is still weak. Beef demand is not the negative factor it was in 2009, but still has a long way to go to recover fully. Photo courtesy of Texas Beef Council.

 


"Rancher's Managment Guide: Cattle Market Challenges and Opportunities in the Coming Months" is from the September 2010 issue of The Cattlemen magazine.