What’s ahead for 2015 on the cow-calf side?

What’s ahead for 2015 on the cow-calf side?

What a great year 2014 was for the U.S. beef industry, as virtually all beef prices trended higher for the year. In general, all beef industry sectors posted profits — mostly record profits. Meanwhile, a decreasing supply of beef coupled with strong demand for beef led to increased slaughter-cattle prices throughout most of 2014.

The key to making a profit from feeder cattle when prices are trending up is to just own cattle. The longer you own feeder cattle, the higher the profits. Your costs of production aren’t that critical in such a situation. However, should cattle prices level off or even out, then the costs of production and buy/sell margins again become critical.

As I’m writing this, feedlots continue to make good money. My latest calculations indicate buying feeder cattle in July 2014 and harvesting them as finished cattle in mid-December 2014 generated a profit of $168 per head. While this figure is down from previous months, it’s still very favorable.

Generating a profit from finishing cattle in 2015, however, will be more difficult, thanks to the rapid increase in feeder-cattle prices during 2014.

Let’s look at slaughter-cattle prices. Year 2014 generated record-high feedlot margins due to the trend in rising cattle prices. When feedlots make money, they typically plow that money back into replacement feeders, thus driving up the price of feeder cattle. With feeder cattle currently in short supply, some feedlots will not have feeder cattle. 

Figure 1 presents the average annual live-cattle futures prices from 2006 to 2014, with projections for 2015. The 10-year trend was a positive $7.79 per year. The upward trend started in 2009, with the largest price increase occurring in 2014.

The current annual futures prices for 2015 indicate a slight increase over 2014. The main reason is that 2014 began lower and ended up strong at the end of the year. I don’t expect 2015 to duplicate 2014.

Can we maintain these record live-cattle harvest prices? I think the national economy is placing some brakes on increasing cattle prices.

The mid-December live-cattle futures in Figure 2 indicate a slight dip in the 2015 prices. This concerns me. Does it hint at a definite downturn or a short-term slump? I don’t know the answer, but I have noticed the price of beef servings rising at many restaurants. Will consumers continue to eat beef at these increased prices?

Decreasing oil prices imply that consumers will have more discretionary income in 2015. Nor have I seen any indication of falling demand for beef thus far. This is good, but the question is whether the situation will last.

A mid-December 2014 chart that raises some concern is the calculated price drop for live-cattle futures from mid-November to mid-December (Figure 3). These prices were obtained just as the national stock market was struggling and oil prices were trending down. I suspect there is some carryover from these markets to the beef market. I’m watching this closely, and it’s not a particularly favorable sign.

In regard to feeder-cattle prices, Figure 4 illustrates the upward trend in feeder-cattle futures. Meanwhile, Figure 5 provides a long-run picture of feeder-cattle futures from mid-2006 to 2014, with monthly projections through November 2015.

The 2006-2015 trend in feeder-cattle futures was a positive $1.13 per month over this 14-year period, with October 2014 being the highest in this chart. Figure 5 also illustrates that from May 2014 to November 2015, feeder-cattle futures prices were above the trend line — a positive indicator for the production and marketing of 2015 calves.

Figure 6 depicts a disturbing decrease in feeder-cattle futures prices from mid-November to mid-December 2014. This drop occurred along with a declining stock market and declining oil prices, so it’s difficult to know if there’s a significant correlation among these three markets. I’ll be watching this market closely, looking for any clues as to the market price direction for feeder cattle.

As a general rule, markets typically overreact on both the top side and the bottom side, which is illustrated by the corn market. Figure 7 presents a 17-year history of corn prices, which has been positive at the rate of 20¢ per year. Note the substantial corn-price increase due to ethanol demand from 2007 to 2013.

Corn prices decreased dramatically in 2013 and 2014, which helped fuel the increase in feeder-cattle prices in 2014. This chart suggests, however, that corn prices aren’t returning to the previous lows of the early 2000s, but may stabilize in the low $4-per-bushel range. Lower corn prices, coupled with the lower supply of feeder cattle and higher slaughter-cattle prices, are what drove feeder-cattle prices upward in 2014.

What does this mean for the ranch? Feeder-cattle futures prices at this writing (Figure 5) suggest that feeder cattle and weaned calves may well be approaching a market top for a while. But a powerful force that may keep feeder-cattle prices strong is the fact that feeder-cattle supplies will take three years or more to expand.

Of course, as herd expansion is initiated, it means fewer feeder calves, as more females are diverted from feeding to breeding. All this leads to my conclusion that feeder-cattle prices should stay strong for the next two years or more.

My current projection (as of mid-December 2014) for 550-pound weaned steer calves in October 2015 is $288/cwt. This compares to $309 per cwt in October 2014, and $198 in October 2013. Should this price be realized, I project my western Nebraska study herd will generate a $580 profit per cow by selling at weaning in the fall of 2015. This is down only slightly from the calculated $601 profit per cow in 2014. 

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Kuna, Idaho. Reach him at 701-238-9607 or [email protected]

 

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