Feedlot cattle eating

Cattle profit opportunity remains

Demand may keep calf prices for this year and for the cycle above the cost of production for low-cost and average-cost producers, according to CattleFax.

Cattle producers are strongly positioned to ferret out some profitability this year. It could be a few dollars per head or near $100 for cow-calf producers, depending on which analysts you consult, as well as the cost structure of individual operations. But, margins will likely narrow across all production sectors, even before considering the nascent, expanding drought across a wide swath of cattle country.

“We’ll continue to see profitability but margins could start to slip for cow-calf producers,” explains David Williams, who leads the global protein team for Informa Economics IEG. Williams provided a market outlook during the recent Cattle Industry Convention.

At its 2018 Industry Outlook during the NCBA meeting, CattleFax projected the average price for feeder steers (750 pounds) at $145 per cwt., with a range from the upper $120s to $160 per cwt. CattleFax pegs average steer calf (550 pounds) prices at $158, ranging from $170 for the spring high to the upper $130s for the fall low.

For both this year and in terms of the current cattle cycle, CattleFax CEO, Randy Blach, says demand may keep calf prices above the cost of production for low-cost and average-cost producers. 

Williams believes feeder cattle and fed cattle prices could diverge this year, unlike the current, lengthy stretch when they’ve moved in tandem. He explains that possibility stems from earlier feedlot placements last fall and early winter that could support calf and feeder cattle prices. Conversely, increasing beef production could challenge fed cattle values.

For cattle feeders, IEG projects continued profitability in the first quarter, drifting toward breakeven and then red ink as the year wears on. That’s on a cash to cash basis with no risk management.

“Cattle feeders are going to have to use risk management tools to manage price risk and create value,” Williams says.

CattleFax projects the average fed steer price this year at $115 per cwt with a range of $110-$130 per cwt. The most recent World Agricultural Supply and Demand Estimates project fed steer prices at $122-$126 in the first quarter; $117-$125 in the second; $110-$120 in the third; $112-$122 in the fourth.

IEG sees cash fed cattle prices at $125-$127 for a high, potentially falling below $100 during the seasonal summer ebb.

Keep in mind these projections are based on growing beef production.

CattleFax projects 3% more this year than last at 27.5 billion pounds, ultimately peaking at more than 29 billion pounds for the cycle. This year’s estimate is based on projections of fed slaughter of 26.6 million head, which would be 3% more than last year.

Although IEG projects the beef cowherd to continue expanding through 2020, Williams notes, “If La Nina continues to spread, we could see expansion come to a halt this year.”

The aforementioned profit potential is also based on growing beef demand.

Domestically, Williams points to cheaper beef prices to the retailer and heavy featuring opportunities, which will help beef maintain protein market share.

CattleFax expects the Annual U.S. Retail Beef Demand Index to be stable this year at 121 (it was 123 in 2016). Analysts there note that recent tax reform and expected GDP growth of 2-4% provides demand support. At the same time, they expect interest rates to increase 1.00-1.25% this year.

Internationally, Williams says, “We see wonderful global beef demand continuing. The world is getting richer every day and they want to eat more protein.” He adds that protein demand from emerging markets revolves mostly around pork and poultry, but that is supportive to beef prices, too.

CattleFax looks for U.S. beef exports to increase 6% this year to 3 billion pounds.

“The balance of trade improved by 1 billion pounds between 2015 and 2017, offsetting 40% of the production growth,” says Kevin Good, CattleFax senior analyst.

“We have to see these exports grow,” Blach says. “We’ll need to see record export numbers through the balance of the decade to keep supplies from overwhelming the market.” He adds that overall demand will be the key to maintaining fed cattle prices in the $100 area through 2020.

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