Expansion economics adds to angst

Expansion economics adds to angst

“There seems to be a fear that there is no bottom to markets once the cow herd expands and beef production starts to rise,”  says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University.

“The beef industry’s transition to larger beef supplies in 2016 has been challenging,” says Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “A persistently bearish psychology and ridiculous volatility in live and feeder cattle futures recently has contributed to a meltdown in cash markets and a mood among producers that is best described as fear. As a result, some producers (and lenders) seem unable to do much of anything at this time.”

Though exacerbated by such forces as volatility and the sheer height that prices reached at their apex, the cyclical price decline should come as no surprise.

In his weekly market outlook at the end of August, Chris Hurt, an agricultural economist at Purdue University, explained prices are moving lower, expectedly, as producers fill the supply gap cleaved by drought and feed supply price shocks during the last decade.

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“There seems to be a fear that there is no bottom to markets once the cowherd expands and beef production starts to rise,” Peel says. “There seems to be a feeling that any data with a positive year-over-year change (herd inventory, cattle slaughter, beef production, feedlot placements, etc.) is cause for rampant bearishness.

“Perhaps the fact that the industry has not experienced a cyclical expansion since the early 1990s is part of the problem. Some younger producers and traders have never participated in herd expansion, and no one in the industry has in more than 20 years.”  

For perspective, Peel expects the beef cowherd to show growth on Jan. 1 of 1.5-2.5%.

“Added to the expansion in 2014 and 2015, the Jan. 1, 2017 beef cow herd inventory is likely to be near 31 million head,” Peel says. “This puts the beef cow herd inventory back to the level at the beginning of 2011 before drought liquidation dropped the herd by an unplanned 2 million head.

Although the expansion since 2014 is properly characterized as cyclical expansion, it can also be thought of drought recovery so far. “There is little doubt that the herd was poised to expand in 2011 in the absence of drought, so it hardly seems likely that expansion to get back to that level can be thought of as drastically overshooting the mark.” 

“Why are animal prices moving lower?” Hurt asked. “The big picture answer is that the animal industries are rebuilding per capita supplies because of lower feed prices and restocking brood cows in the Southern Plains. It seems increasingly likely that the meat industry will totally fill the supply gap that was created from 2007 to 2014…The meat industries are expected to continue to increase supplies until animal product prices drop to levels that approach breakeven levels.”

 

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