Perfect cattle market storm weakens

2015 cattle prices should challenge record highs, but with more volatility and uncertainty.

Wes Ishmael

March 3, 2015

10 Min Read
Perfect cattle market storm weakens

Go ahead. Frame and hang those breathtaking snapshots of the 2014 cattle market. Nobody ever saw anything like it. No one may see its likes again.             

In his weekly market comments at the end of December, Derrell Peel, Oklahoma State University extension livestock marketing specialist, offered perspective on 2014, and compared to the previous year:

•   Calf prices (450-500 lbs. steer) were 53 percent higher, following an increase of 30 percent in 2013.

•   Feeder cattle prices (750-850 lb. steer) were about 43 percent higher, following a 13 percent increase the previous year.

•   Fed cattle prices were 28 percent higher, following a 5 percent increase in 2013.

•   Boxed beef wholesale values were 25 percent higher, following a 4-8 percent increase in 2013.

•   Retail prices were up 15-20 percent, following a 5-6 percent increase the previous year.

“Tight supplies, of cattle, of beef, and of competing meats, contributed to unprecedented prices at every level of the market,” says John D. Anderson, deputy chief economist at the American Farm Bureau Federation, in the mid-January “In the Cattle Markets.” “Retail beef, wholesale beef, fed cattle, feeder cattle, stocker cattle, cull cattle—every part of the industry witnessed record prices in 2014.”

The U.S. cattle inventory (all cattle) began 2014 with the fewest head since 1951. The beef cow inventory was another one percent less than the previous year. The inventory of cows and heifers that calved the previous year (all cattle) was the paltriest since 1941.

Feed prices and cost of gain continued to sag lower, too, with expectations and ultimate fruition of a bin-busting corn crop—a staggering 14 billion bushels or so.

At the front end of January, spot corn futures (March) were about $4/bushel compared to $6.90 two years earlier.

On the other side of the equation, despite predictions by some that consumers were being priced out of the beef case, domestic beef demand remained extraordinarily strong.

In fact, through the third quarter of 2014, the All Fresh Beef Demand Index (AFBDI) had increased 16 of the last 17 quarters year-over-year, according to Glynn Tonsor, agricultural economist at Kansas State University. Year-over-year, both the AFBDI and the Retail Choice Beef Demand Index were 3.9 percent higher in the third quarter.

“To better understand the AFBDI, note this demand increase reflects per capita consumption declining by 4.6 percent and real (inflation-adjusted) prices increasing by 11.3 percent ($5.51/lb. nominal price),” Tonsor explains. “If real prices would have increased by 7.1 percent then the AFBDI would have been unchanged from the third quarter of 2013. The fact prices increased more than this 7.1 percent ‘no demand change’ level, signals that beef demand improved notably.”    

In other words, although beef consumption is declining due to tightening supplies, the fact is that through the third quarter, consumers were paying more for available supplies than they would if true demand wasn’t increasing.

International demand for U.S. beef also continued at a record pace.

U.S. beef exports were two percent more for January through November, compared to the same period a year earlier, according to the U.S. Meat Export Federation (USMEF). Beef export value was up 16 percent. Even though wear began to show, beef exports were still accounting for $293.96/head of fed cattle slaughtered.

As Anderson mentions, competing meats offered less price pressure to beef, as well, with pork producers battling porcine epidemic diarrhea virus, while egg sets were down as chicken producers reportedly battled fertility problems in their operations.

Along the way, there was plenty of uncertainty stemming from the sheer price height, the kind that goes with uncharted territory. All and all, though, cattle and beef prices just kept moving higher from historic highs to new highs.

Then came December.

Feeder cattle futures bogged down in daily price limits that had never been adjusted, though prices grew exponentially. The market began feeding on itself as sell orders stacked up with no means of executing them. After five consecutive limit-down ($3) sessions, limits were expanded. Boom, just like that, prices rose. Then dropped. Then rose. Through the middle of January the cattle futures roller coaster ride was of the white-knuckle variety.

During the same time period, the spread grew between nearby futures markets expectations and cash market reality. Wholesale beef values continued to gain and so did cash fed cattle prices.

Though cattle and beef prices continued at historically high levels, volatility was so extreme and schizophrenic that it became easier for some to see the industry cup draining away, rather than recognizing that it was still near overflowing.

So, no one is ready to pronounce the market bull dead; cattle numbers are too thin and beef production will be too short to do so from a fundamental standpoint. Plus, markets are notorously tough to gauge on either side of the holiday season.

However, there’s no questioning the fact that some of the same winds that blew up such a perfect market storm last year are beginning to weaken.

“I see little risk of any major market break; annual average cattle and beef prices will be higher than 2014,” Peel explained. “That said, it may be hard to extend the impressive market gains of 2014 much higher. With less of an uptrend in markets generally, cattle and beef markets may follow more of a seasonal pattern in 2015. Seasonal price peaks that exceed 2014 records are possible, perhaps even likely, but may be harder to sustain. All in all, I expect 2015 to be more of a sideways market, albeit with prices close to, if not higher, than record levels.”

Global economic growth adds uncertainty

Neither cattle numbers, nor beef production will pressure fundamental supply bullishness, unless you count continued pressure on feedlot and packing capacity.

“Anecdotal evidence has been mounting for some months that herd expansion has gotten well underway,” Anderson says. “When the January 1 inventory report comes out, it should provide some hard data to either confirm or refute this anecdotal evidence. Whatever the case, though, the path from herd expansion to higher beef production is a rather long one due to the production lags inherent in the system. This means for 2015 another year of smaller beef production.”

Drought is an obvious wild card in potential expansion. A less obvious one is producer age and how many folks planning to cash out at some point in time might figure that time is now. As the year progresses and begins looking toward the next crop, corn prices could also emerge as a more forceful price driver.

Analysts with the Livestock Marketing Information Center (LMIC) expect cattle slaughter this year to decline one percent to four percent. Even with expected heavier carcass weights, they peg beef production this year at one percent less.

“Preliminary forecasts indicate that year-on-year drops in U.S. cattle slaughter may essentially end by 2016; in fact, by then beef tonnage may post a small year-over-year increase,” LMIC analysts say. “2016’s annual U.S. beef output is forecast to be 24.2 billion lbs., more than 1 billion lbs. below 2013’s. So, the supply side suggests beef and cattle prices will tend to gradually erode over the next few years rather than collapse, barring any outside market shocks like drought or a U.S. economic recession.”

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Although beef production this year is projected to be lower, according to the December “World Agriculture Supply and Demand Estimates,” pork production is expected to be 4.6 percent higher, broiler production 2.7 percent higher and total red meat and poultry production 2.0 percent higher.

LMIC analysts expect increased pork and poultry production, and their lower prices compared to beef, to pressure beef demand the next couple of years. They also say beef export demand could be softer the next couple of years, especially in 2015.
“Demand for U.S. beef and pork remains strong, as international buyers appreciate the unmatched quality and consistency of our products,” explains Philip Seng, USMEF president and CEO. “But lower slaughter numbers reduced 2014 supplies, which obviously had an impact on prices, and in recent months buying power in many key markets has been affected by slowing economic growth and weaker currencies. Market access restrictions in several important markets, including China and Russia, also had a big impact on opportunities for U.S. exports last year. The outlook for 2015 is for more of the same, but our industry has proven its ability to identify and develop export outlets in difficult times. When I look across the world as a whole,
I still see good potential for further expansion of red meat exports in 2015.”

While the stronger U.S. dollar makes domestic beef a more expensive purchase for international buyers, global economic growth is casting the darkest shadow of uncertainty.

Look no further than the gas pump.

Spot month crude oil futures (February-West Texas Intermediate) were about $97/bbl. in June (Intercontinental Exchange). Toward the middle of January they were about $46.

For a while, the popular explanation for such a steep price plunge was credited to a simple supply surplus. As the slump continued, joined by other industrial commodities like copper, the notion grew that anemic global economic growth was more pronounced than previously thought.

In its semi-annual economic outlook issued in January, the World Bank was still predicting global economic growth this year at three percent, but that was 2.4 percent less than its June estimate.

It’s true that U.S. consumers should be enjoying an economic windfall of sorts from lower gasoline prices. However, judging by the month-to-month decline in December sales of food and retail services (U.S. Commerce Department), the expected boost in consumer spending was muted at best.

Moreover, Peel said in December the full brunt of record wholesale beef prices were yet to be realized in already record-high beef retail prices.

“Thus, even if additional supply declines were not expected, retail prices will face additional upward pressure in 2015,” Peel explained. “More price pressure is expected from calf prices upward to retail, adding additional pressure to margins at the feedlot, packer and retail levels. Feedlots already face sharply higher breakevens in early 2015 due to high feeder cattle prices.” 

LMIC forecasts calf prices this year to grow by about 13 percent and yearling prices to increase about 10 percent .

“Those are much smaller percentage increases than recorded in 2014,” LMIC analysts say. “As with fed cattle, calf and yearling prices are forecast to be a little below a year earlier by the fourth quarter of 2015. Looking ahead to 2016, calf and yearling prices will likely continue slipping.”

So, barring some sort of massive outside market shock, 2015 begins on the upper end of price history, but with plenty of market uncertainty.

“Overall, with more meat in the pipeline and a tougher export market to deal with, it will be tough to replicate 2014’s cattle market, especially the fourth quarter market, which was clearly one for the ages,” Anderson says. “Demand has been very good, and we can hope, even expect, that it will remain so. But unless domestic demand actually improves, the balance of market fundamentals tilts toward some decline in prices from recent record levels. Keep in mind that year-over-year comparisons for the first quarter will still look quite good even if we aren’t quite matching the fourth quarter records.”


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