March 10, 2020
Cattle prices are poised to trend higher — finally. That’s thanks in part, at least, to a momentary pause in herd expansion, ongoing domestic demand strength and promising U.S. beef exports.
“The low prices are in,” says Randy Blach, CattleFax CEO. “That doesn’t mean prices will be a rocket shot, but we’re going to continue to see this market get better over time.”
Blach and other CattleFax analysts offered perspective on the current and future market landscape at this year’s “Industry Outlook” during the annual Cattle Industry Convention in San Antonio. In fact, the 2020 CattleFax price outlook is among the more bullish.
CattleFax forecasted steer calf prices (550 pounds) this year at $6 higher than last year at an average of $170 per cwt, across a range of $155 to $180. Prices could get an extra boost this fall if a record corn crop is in sight, which seems plausible.
Mike Murphy, CattleFax vice president of research and risk management services, projected farmers will plant 4 million more acres to corn this year than last year, at 94 million acres.
Notwithstanding a significant weather challenge, he pegged the spot corn price this year at $3.50 to $4 per bushel, down 15 to 20 cents per bushel from last year.
CattleFax projected feeder steer prices (750 pounds) to average $6 higher than last year, across a range of $140 to $160 per cwt.
Further, CattleFax pegged fed steer prices at $120 per cwt, which would be $3 more than last year. Analysts noted downside risk at $108 and resistance at $130.
Also, Kevin Good, CattleFax vice president of industry relations and analysis, noted that fall price rallies typically match or exceed spring highs in nonexpansion years like this one.
“Let’s not be surprised if the fall lull in calf prices is $160 or above, especially if corn is $3 to $3.50 per bushel, versus $3.50 or higher,” Good said.
Fundamentals at work
Part of the price support is due to declining cattle numbers, courtesy of plateauing inventory.
Beef cows at the beginning of the year, at 31.31 million head, were 1.18% less (−374,000 head) than the previous year, according to USDA’s Cattle report.
Beef replacement heifers as of Jan. 1 of 5.77 million head were 1.92% fewer (−113,000 head) than the previous year.
USDA pegged the Jan. 1 inventory of all cattle and calves at 94.41 million head, which was 0.41% less (−391,400 head) than a year earlier.
The estimated feeder cattle supply outside feedlots Jan. 1 of 26.45 million head was 0.4% less (−105,300 head) than a year earlier.
Even so, the number of cattle on feed Jan. 1 — for all feedlots — of 14.68 million head was 2.16% more (309,800 head) than the previous year. That’s the largest Jan. 1 inventory since 2008, according to Derrell Peel, Extension livestock marketing specialist at Oklahoma State University.
“With total cattle inventories at or just past a cyclical peak, feedlot inventories will likely peak in the next few months,” Peel explained in his early-year weekly market comments. “However, average feedlot inventories are currently record-large. After peaking last August, then declining for two months, the 12-month moving average of feedlot inventories moved higher the last three months and is currently at 11.64 million head, record-large for the current data series back to 1996.”
Moreover, beef production this year is projected to be record-large, as is production of pork and poultry. CattleFax projected total U.S. beef production about 600 million pounds higher this year than last year, at 27.7 billion pounds.
However, Good explained, “The balance of trade this year could easily take 50% of that production increase off the market, keeping our domestic supplies more manageable.”
5% export increase this year
CattleFax looked for U.S. beef exports to increase 5% this year, helped along by resolution to a number of trade deals at the end of 2019 and the beginning of this year.
Incidentally, Good expected cull cows to average $65 per cwt this year, from a fall low near $55 to a high in the low $70s. Although herd expansion leaves more utility cows on the market, he explained that increased demand for lean trim and a decline in the availability of imported grass-fed trim from Australia and New Zealand will be supportive of cow prices.
“Modestly higher prices in 2020, combined with improved international market potential, could restart herd expansion,” Peel said. “Alternatively, continued political and economic turbulence or shocks, such as coronavirus, could drag markets down and hold cattle inventories flat, or fall into more liquidation.”
At the same time, current packing capacity — reduced significantly when cattle numbers were lots fewer — could cap herd growth, according to Blach.
High-quality beef demand rises
Part of the projected price support this year also revolves around growing beef demand, built on the back on increased quality and consistency.
Consider that premiums for cattle grading Choice and Prime continue to grow over time, on average, as the supply increases.
“I think we’re going through a major transformation in our industry, where we are moving away from the boom-and-bust, supply-driven market to a demand-driven market — one that waits for a demand signal and then responds to that demand signal,” Blach explained.
As well — and this is key — consumers continue to prefer beef more than they do competitive proteins, based on beef’s expanding market share of retail spending. Total U.S. consumer expenditures for beef increased 4% to $111 billion last year, according to CattleFax. Projections call for another 2% increase this year to more than $113 billion.
Blach explained that from 1980 to 1990, there was an estimated $32-per-head profit, on average, to split among cow-calf producers, stocker operators, cattle feeders and beef packers. This year, CattleFax estimated there will be nearly $500 to divvy up — among the most in history. He said he expected all sectors to be profitable this year.
“I believe U.S. agriculture is well-positioned,” Blach said. “I’m bullish on U.S. cattle production because of the landscape we see. I believe we have a very bright future and something we should all be excited about.”
In the longer term, though, Blach did offer a word of caution.
He recalled that from 1980 to 1998, beef demand was cut in half, and 403,000 cow-calf producers went by the wayside.
“If we don’t handle this sustainability message, that’s what we could be looking at again,” Blach said. “I believe this is our greatest risk as an industry. That’s how important I believe it is that we get out and tell this story. We’ve got a great story to tell. The U.S. has the most environmentally efficient beef production system in the world, but we’re always on the defensive. We’ve got to go on the offensive.”
Drier, warmer weather ahead
The wet weather across much of the U.S. will soon end, as the El Niño phase of sea surface temperatures switches back to the warmer La Niña phase.
That’s the forecast from Art Douglas, climatologist for CattleFax and a climatology professor emeritus for Creighton University. Douglas shared his forecast during the annual CattleFax seminar at the Cattle Industry Convention in San Antonio.
Douglas explained that sea surface temperatures (SSTs), which drive the two alternating weather patterns known as El Niño and La Niña, are showing classical patterns of change and are well predicted by weather models to shift this year. Although SSTs along the equator have not yet shifted from cool to warm, SSTs off the coast of Chile are moderating back toward warmth, and this fits the pattern of shift back toward El Niño.
For most U.S. beef and crop producers, Douglas said this will mean a shift back toward drier and warmer weather patterns. The exception typically occurs in the Pacific Northwest and the Southeast. Douglas said the length and intensity of La Niña will influence drought conditions in the Southwest and Plains regions, although warmer SSTs may influence the northern Pacific Ocean and may slow development of the La Niña weather through the summer.
The shift in SSTs will help relieve drought in Australia; in fact, that appears already to be beginning, he said. Conversely, the shift also typically brings more droughty weather to the Southwest, including Texas. This is concerning for cattle production because of the large number of cows in Texas, added Kevin Good, one of CattleFax’s analysts.
Douglas said he expects this weather pattern in the El Niño to transition to La Niña this year.
This spring, colder temperatures will persist into the Great Lakes into March, but above-normal temperatures should occur in the Corn Belt in April and May. He said the Western third of the nation will stay warmer from late winter into spring, with drier conditions intensifying from the Southwest into the central Rockies and Plains through spring.
Douglas said to expect hotter weather across the West and High Plains this summer, although he called for summer temperatures closer to normal in the central part of the country. If La Niña strengthens early, though, the warmth could expand into the Midwest. He added that the Corn Belt will not see a repeat of last year’s floods.
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