Is The Cattle Market Nearing Its Top?Is The Cattle Market Nearing Its Top?
While the cattle market hasn’t topped, analysts say it may be in view, distantly.
September 16, 2014
“Near perfect” is how analysts with the Livestock Marketing Information Service (LMIC) in Denver describe the supply-and-demand circumstances that came together in the first half of the year to create record-high cattle prices.
In fact, LMIC says that, for the first half of the year, fed cattle prices averaged 17.5% higher than the first half of 2013, while feeder and calf price increases were even more dramatic—yearlings were up 30% and calves climbed 32%.
“Dramatic price increases raise the question of when is the peak and at what level? The answer is probably not yet, but it is coming into view,” LMIC analysts say.
The view from the mountaintop, however, shows a distant horizon. If current conditions remain in play, LMIC expects the cattle market to remain stout at least until 2017. “This means financial planning will be critical the next few years to take full advantage of profit levels,” analysts stress.
Cattle prices are likely to post year-over-year gains again in 2015, but not necessarily every week, or even every month. The smallest increases in cattle prices during 2015, compared with 2014, are forecast for the fourth quarter; unchanged to up 3%, LMIC says.
“Two major uncertainties need to be monitored: crop production and the macroeconomic environment (that of domestic and foreign beef buyers. Without issues in those two areas, annual average cattle prices could peak in 2016 or 2017,” LMIC predicts.
However, if U.S. crop production gets hit with unfavorable weather such as drought, then yearling and calf price declines are almost assured, analysts say. Cattle feeders will be very sensitive to any surge in corn and soybean prices added onto already record-high feeder calf costs. In that situation, annual yearling and calf prices will peak before those of fed cattle.
“If the U.S. economy slips into recession in late 2016 or early 2017, fed cattle prices will decline,” LMIC analysts say, because it would reduce wholesale beef prices and, therefore, bring a peak in cattle prices.
Moreover, in terms of trade, the economies of major U.S. beef buyers will remain a key source of demand and price drivers. “Economic growth in Mexico, Japan, and South Korea could be particularly important. Beyond economics, geopolitical factors can come into play that are not easily anticipated, the most recent example this summer has been the international response to Russia and their retaliation using trade bans on agricultural products,” LMIC says.
“All else equal, slow herd growth in coming years will tend to translate into price erosion after the peak rather than an abrupt drop. Even after the peak, calf prices in the Southern Plains are likely to remain above $200/cwt. for several years,” LMIC analysts predict.
What about 2014?
Annual fed cattle prices based on the USDA-AMS 5-Market Average in 2014 are projected to average more than $150/cwt. for the first year ever. In the third quarter of this year, LMIC projects fed cattle to average in the $150s/cwt., the fourth-quarter forecast is in the high $150s to low $160s.
Coupled with lower feed costs, cattle feeders have enjoyed profitability. Estimated feeding returns were positive for each of the first eight months of 2014. July’s closeouts had the largest per-head profit for any month since November 2003. In turn, cattle feeders became very aggressive bidders for feeder cattle and calves.
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But it appears the run in profits won’t last. The corn price drop has not been compensating for higher feeder cattle prices. If corn costs over the next few months continue to decline as expected, LMIC calculated a 750-lb. steer placed in mid-August in the Southern Plains to have a breakeven sale price of about $170/cwt. That animal should be finished by early next year. Those breakeven sale prices will be difficult to cover and may make cattle feeders more cautious buyers of yearlings and calves, LMIC says.
Just how cautious, however, remains to be seen. Using Southern Plains prices, LMIC forecasts 700-800-lb. yearling steer price to average $200 to $204/cwt. for the year, and 500-600-lb. steer calves to average $237 to $241.
Cow-calf operators are the major beneficiaries of this market. For 2014, LMIC estimates cow-calf returns just below $490/cow. While returns per cow will vary widely from one operation to another, this is a new record high, vastly surpassing the previous high in 2004 of about $150. LMIC estimates 2015 returns will remain large and may remain well over $450/cow even if some production costs, like interest, increase. “The beef cow enterprise in 2014, and probably for several more years, will provide a true economic profit. It will require planning to take full advantage,” LMIC says.
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