Live Cattle Market Situation

Last week’s live cattle average price was just under $120 per cwt. This was the “5-area” average price which simply means that it was the average of the five major feeding and processing areas: Texas/Oklahoma/New Mexico; Kansas; Nebraska; Colorado; and Iowa/Minnesota. The live cattle market is heavily influenced by beef demand as this is the stage of the beef production chain where cattle can be turned to beef. If packers need more beef to fill orders and meet demand, then they can bid more aggressively on live cattle. If beef demand is light, then packers may not bid as strong for live cattle. A “normal” year would see live cattle prices peak in the early Spring ahead of the summer holiday and grilling season. The late winter and early Spring months are also the months with the lowest number of cattle slaughtered.

Also important is the supply of “market-ready” cattle available. This represents the number of cattle that are sitting in feedlots that are ready to go to packers. The best observation of the price point where beef demand and the supply of market-ready cattle come together is found in the live cattle market. The term “market-ready” captures a pretty wide range of cattle because it can differ depending on the market situation. For example, in the Spring of 2017, higher live cattle prices led feedlots to market some lighter cattle than normally would have. During this time there were not enough heavier cattle to meet beef demand.

We are starting 2018 at very similar live cattle prices to what began 2017 even if some of the underlying market forces are different from a year ago. Higher placements of cattle into feedlots throughout 2017 might suggest there will be plenty of market-ready cattle available to meet the expected seasonal increases in beef demand in the coming months. That probably makes it unlikely that we will see a supply-driven surge into the $140s like we did in 2017. However, even with the larger number of cattle placed, feedlots remain very current. Strong marketings throughout 2017 ensured that feedlots didn’t swell with market-ready cattle waiting to be sold. The number of cattle on feed over 120 days was actually below the prior 5-year average in December.

The current situation is that prices are relatively strong despite the increased supplies. Strong domestic and international beef demand is allowing for outlets for the increased beef production without forcing market prices to very low levels. It is also helping move cattle through feedlots which is important for feeder markets. When and how high the peak in the live cattle market will be in 2018 will have implications throughout the beef production chain.

International Trade and Cattle on Feed

Happy New Year! This week’s newsletter will focus on two main topics: (1) the latest international trade data released today and (2) the December Cattle on Feed Report released on December 22nd.

(1) The latest Livestock and Meat International Trade Data was released by USDA ERS today. Total beef and veal exports were up 2.65% during November of 2017 as compared to November 2016. Year-to-date (through November), total beef exports were up 13% over the first 11 months of 2016. Among our top 5 trading partners, exports were up 21.4% to Hong Kong, 13.3% to Japan, and 2.5% to Mexico.These increases were partially offset by export decreases of 18.9% to Canada and 5.6% to South Korea. In total, November saw beef exports of 261 million pounds and imports of 212 million pounds.

Just under 2 million pounds of U.S. beef was shipped to mainland China in November. This is the highest monthly total of 2017 and I expect we will continue to increase exports to China. For the year (through November), about 7 million pounds of beef has been shipped to mainland China.

 


(2) The latest Cattle on Feed report showed the December 1 feedlot inventory at 11.5 million head. This was 8 percent higher or an additional 864,000 head in feedlots compared to December 2016. This is also the largest monthly on-feed total since March of 2012 and the highest December feedlot inventory since 2011. Much of the increase is due to a 20.3 percent increase in placements under 700 pounds. This report didn’t necessarily suggest that there were a lot more calves out there that no one knew existed, it just showed that many cattle were placed into feedlots at lighter weights than might have been expected. Lightweight feeders placed now will not be available for placement later. These lightweight placements will be marketed later and are not bunched up with earlier placements.

2017 in Review & Market Factors to Watch in 2018

We have covered a lot of ground in the cattle industry in 2017. It was a year that exceeded nearly all expectations in terms of cattle prices. 2017 ushered us out of the market lows we saw in late 2016 – we’ve probably all tried to forget those few weeks of 95 cents/lb. for 600-700 pound steers just 14 months ago. Since then, the market has shown impressive strength in the face of larger supplies. About 1.3 million more calves hit the ground in 2017 than in 2016. Higher than expected prices in 2017 was certainly a positive sign for the cattle industry as we grapple with continued herd expansion.

We began 2017 talking about the Trans-Pacific Partnership (TPP). This was the trade deal that was would have gradually decreased tariffs on U.S. beef entering Japan, our leading U.S. export market. Of course, U.S. participation in TPP fell apart due to larger political reasons & the U.S. remains at a tariff disadvantage for sending beef to Japan. Beef trade, in general, was the storyline for most of 2017 due to trade renegotiations (or talks of renegotiation) with our biggest trading partners including Japan, Canada, Mexico, and South Korea. These four countries represent over 70 percent of the U.S. beef export market and negotiations (or discussion of negotiation) are ongoing. Despite the presence of trade discussions, our export markets flourished in 2017 and were up over 14 percent year-over-year through October. We also gained access to mainland China for the first time since 2003. Export totals to China have been modest as the market adjusts to the additional requirements for beef qualified for shipment to China.

Now is also a good time to discuss a few questions that will be critical to markets in 2018. While there are many factors to watch, I want to point to three in particular. The first and likely most important is “at what rate did expansion continue in 2017?” We’ll get a good measure of this when the annual inventory data is released on January 31st. I anticipate that expansion has continued, but not as rapidly as in the past few years. The second question is “can we continue to expand our beef export markets at a rapid pace?” I believe are export markets are a primary reason for stronger than expected prices in 2017. With even more supplies coming in 2018, can export markets exceed expectations again in 2018? The final question is “how will expansion of total meat production impact beef?” While beef production is increasing, chicken and pork production is also expanding. This has set the stage for 2018 to be largest total meat consumption year of the past decade. How will this increased production get sorted out at the grocery meat case by consumers?

If one thing is for sure, it is that 2018 will bring surprises just like every year. Here’s to hoping that like 2017, most of those surprises will be good for cattle producers. Happy New Year!

2018 Cattle Market Outlook Radio Segment

Last week I recorded a segment on Farm and Family Radio with Amy Myers to discuss the 2018 Cattle Market Outlook (listen to the radio segment HERE). I thought the transcript of that conversation would be of interest to readers of this newsletter, too – so here it is!

Amy: Today, we’re speaking with Josh Maples, Mississippi State University Livestock Extension Economist. Dr. Maples, first off, tell us a little bit about what all information you consider when studying the cattle market.

Josh: Thanks for having me Amy. The cattle market is a fascinating combination of many different factors and understanding how these factors impact prices is important when forecasting what prices might be in the future. We are operating in a global environment where the amount of U.S. beef consumed in countries around the world can have real impacts on the prices we receive for our calves here in Mississippi. We’re really just trying to estimate supply and demand. But each of those include many aspects of our industry.

Amy: What are some of the most important factors in our industry right now?

Josh: As we end this year and move into 2018, there are a few big storylines that are impacting expectations for our markets as we move forward. The first is increasing cattle and beef production, the second is total meat production, and the third is international trade. These are probably the three most important aspects of our industry right now in terms of forecasting market prices.

Amy: You mentioned increased production. What is happening and how will it impact cattle prices moving forward?

Josh: We’ve been pretty rapidly expanding the herd in the U.S. over the past three years. Producers have retained more heifers and more calves have been born each of the past three years. Larger supplies of calves are turning into increased beef production. The number of cattle processed is six percent higher in 2017 than it was during 2016. With a larger calf crop on the ground this year, too, the number of cattle processed next year will also be larger. This means beef production is increasing. Increasing production means we either have to increase the number of consumers, or current consumers will have to eat more beef. Generally, increasing consumption across the same number of people requires lower prices.

Amy: What about total meat production?

Josh: It’s not just beef production that is increasing. Poultry and pork production are also increasing at the same time. Pork and poultry are competing meats at the grocery store. The price of those meats impacts the amount of beef purchased. For 2018, we’re forecasting about 215 pounds of meat disappearance per person in the U.S. That’s the largest since 2008.

Amy: That is a lot of meat! What is going on with international trade?

Josh: Increased exports of U.S. beef have been an extremely positive storyline of 2017. We have increased exports by about 14 percent over 2016 levels. This is much higher than most expected and it has provided some support to prices. Anytime that we can find new customers for beef, that supports beef and cattle prices because it offsets some of the supply increase. Exports to our largest trading partner, Japan, have been exceptionally strong. Exports to Japan are up nearly 30 percent above 2016 levels.

Amy: Tying all of this together, what does the market look like for 2018.

Josh: 2018 will likely bring slightly lower calf prices for producers in Mississippi, on average. Right now, I’m forecasting prices to be about $5 per hundred weight lower than they have been last year for 500 to 600 pound Mississippi calves. That would put the Mississippi average around $145 for those calves. Now this doesn’t mean prices will be lower all year long – that is my forecast for the 2018 average compared to the 2017 average. There will likely be some opportunities for stronger prices throughout the year.

Amy: Can the factors you mentioned above impact this forecast?

Josh: Absolutely. For example, a primary reason prices have been stronger in 2017 than we forecasted this time last year is that exports have exceeded expectations. My forecast for 2018 uses a more “normal” expectation about growth in exports for 2018. If we grow another 14 percent next year, that will certainly provide some support for prices above what I’ve forecasted. However, we know that supplies are going to be larger in 2018. So the upside to be surprised will likely have to come from stronger than expected demand both domestically and internationally.

Amy: Thanks so much. Today, we’ve been speaking with Livestock Extension Economist Josh Maples. I’m Amy Myers, and this has been Farm & Family. Have a great day!

Cattle on Feed Report

The latest cattle on feed report again shows strong placement totals. During the month of October 2017, placements were 10.2 percent higher than during October 2016 – some of which can be attributed to one additional slaughter day in October 2017. While higher than average pre-report estimates, this number was within the range of estimates. Still, the market reaction was bearish as nearby live cattle futures prices were about $1.50/cwt and feeder futures prices down about $2/cwt at the end of trading today.

This marks the eighth consecutive month of higher placement totals than last year. February has been the only month that showed lower placement numbers in 2017 than in 2016 (although just slightly lower). For the year-to-date, placements have been 9.1 percent higher than the same period last year.

While the high placement totals are filling feedlots, aggressive marketings continue to keep cattle moving through feedlots at an impressive pace. October marketings were 6 percent above October 2016. The strong marketings seen in 2017 have kept a large bottleneck of market-ready cattle from building up in feedlots.

As of November 1st, the on-feed count was 11.3 million head. This is 6.3 percent larger than November 1st, 2016 and a year-over-year increase of 667,000 head. This is the largest inventory for November 1st since 2011.

 

Impressive Beef Exports Continue

The latest trade data released last week showed that the impressive export totals continued through the month of September. Total beef and veal exports were 13.95 percent higher in September 2017 than in September 2016. Year-to-date, total exports are up 14.46 percent over the first nine months of 2016. In total pounds, exports are up about 263 million pounds YTD over last year.

The largest increase was in exports to Japan. U.S. beef exports to Japan were up nearly 40 percent over September of last year. Japan imported 85 million pounds in September. On the year, exports to Japan are up 29 percent over 2016 levels. Exports to Canada and Mexico both grew about 8 percent over September 2016. Exports to mainland China totaled a little over one million pounds in September which makes them the 15 largest importer of U.S. beef.

The continued increase in beef exports is encouraging as it takes some of the beef that would have otherwise ended up on the U.S. market out of the country. With beef production increasing, either domestic consumption has to increase (which usually requires lower prices) or exports have to increase, or a combination of the two. In 2017, larger than expected export totals have lowered the amount of beef disappearance per person in the U.S. This has provided some support to beef prices.

Forage Conditions and Cattle Demand

Forage conditions are an important driver of calf prices this time of year. When forage is abundant, this can support prices as stocker operations want to fill their available pastures. In particular, winter grazing programs in the Southern Plains region (KS, OK, TX) of the U.S. are important because this region is where many of the calves we sell in the Southeast will end up for the winter. Good forage conditions in this region help demand for our calves. In light of this, the next few paragraphs are from Dr. Derrell Peel at Oklahoma State about the current forage conditions in Oklahoma. To summarize his comments, good forage conditions in a major winter grazing region are provided ample pasture space for the calves we sell. This is one piece in supporting demand (and prices) for these calves.

Beginning of excerpt from Dr. Peel:

Despite lagging wheat planting and slow wheat pasture development thus far, forage conditions in Oklahoma are generally very good.  In the last week of October, 83 percent of Oklahoma wheat acres were planted compared to a five-year average of 91 percent for this date. Wheat emergence was reported at 70 percent compared to 75 percent in the five-year average.  However, wheat condition was reported at 47 percent good to excellent and another 46 percent fair.  Seven percent of Oklahoma wheat was rated poor or very poor.  Though little wheat is currently being grazing, wheat pasture will likely develop fairly quickly from this point.

The end of October brings the final estimates of range and pasture conditions for the season.  Oklahoma pasture conditions were rated at 46 percent good to excellent, equal to one year ago, with 44 percent rated fair, up from 38 percent last year.  Only ten percent of pastures were rated poor or very poor compared to 16 percent one year ago at this time.  This year it’s quite common to see cows “belly-deep” in pasture at the end of the growing season.  Abundant standing forage in pastures may help producers reduce hay needs and moderate cow costs this winter.

Unusually favorable growing conditions in the late summer and fall period boosted forage quantities and maintained quality above average.  USDA-NASS increased Oklahoma hay production estimates in October significantly from the initial estimates in August. Other hay production was revised up by nearly 18 percent from the August estimates leading to a 2017other hay production estimate of 5.0 million tons, down less than one percent from the 2016 level.  Alfalfa hay production was increased by three percent over the August estimate to a 2017 total of 1.122 million tons, 40.6 percent higher than 2016.  Combined 2017 alfalfa and other hay production in Oklahoma is now projected to be up 4.9 percent from 2016 levels.  Combined with slightly higher May 1 hay stocks, total Oklahoma hay supplies for the 2017/2018 winter feeding season are up 4.6 percent compared to last winter.

 

Feeder Prices Outpacing Seasonal Trends

Feeder price performance this Fall has not followed the seasonally expected trend of lower prices from August to October. Cattle prices generally follow seasonal patterns due to when calves are weaned and sold, when grazing pastures are available, seasonal beef demand, etc. Past performance of prices during this period suggests that prices for 500-600 lb. steers would decline about 7.5% on average from August to October. This year, however, prices were about 2% higher in October than in August. This suggests that prices are about $13 higher per hundred pounds than we would’ve expected if normal seasonal patterns held.

The seasonal price index was constructed using data from 2011 to 2017. It represents how much monthly average prices differ from annual average prices. This is calculated by dividing each month’s average price by the average annual price. Next, the monthly average across the years of data is calculated to obtain an average price index. The price index calculated in this article has a base value of 1. This implies that if a given months price index is 1, the average price in that month is equal to the average annual price. If a monthly index value is 1.05, then the average price in that month is five percent higher than the annual average.

The fact that prices are outperforming seasonal norms during a time of increasing supplies begs the question of whether the normal price patterns will hold in the coming months. For instance, October is usually the time of the lowest within-year prices for 500-600 lb. steers in Mississippi. Did the low-point occur earlier this year? Or will it be later? I would lean toward the low-point having occurred earlier. Current Spring futures prices are allowing profitable stocking opportunities and fed cattle prices have improved to increase packer margins. Each of these points provide support for feeder prices as they suggest that potential buyers still see profitability, even if the prices are higher than the time of year might suggest.

Feedlot Placements Higher, but Marketings Strong Also

The latest USDA Cattle on Feed report released Friday showed larger supplies of cattle placed into feedlots was expected prior to the report. The report showed a 13.5% increase in the number of cattle placed into feedlots during the month of September 2017 as compared to the September 2016. Average expectations prior to the report were that placements would be up 7.5%. The 13.5% increase totals a 255,000 head increase in the number of cattle placed in September 2017 over last year. This year’s placements were the largest for any September since 2011. Further comparing 2017 to last year, in total, 1.4 million more head of cattle have been placed into feedlots during the first 9 months of 2017 as compared to the same period in 2016.

 

While placements seem to capture most of the headlines, aggressive marketing rates continue to pull cattle through the system and keep slaughter weights down. In September, cattle marketed by feedlots were 2.9% above 2016’s. There was one less slaughter day this September than a year ago, so average daily marketings were 8.0% above 2016’s. Even though the head marketed has been well anticipated, its role in the market has been key to fed cattle prices, which recently have been more than $10 per cwt. above a year ago.

A critical result of the marketing pace has been year-on-year declines in slaughter steer and heifer dressed weights. The aggressive marketings since late 2016 have been pulling animals through the feeding stage of the production system, and that has driven weights below a year ago. For the five weeks prior to October 7th, steer carcass weights have been essentially flat and did not increase seasonally. This has major implications in that it suggests we do not have a swelling of market-ready supplies sitting in feedlots.

Beef Exports Remain Strong

Beef exports continue to exceed 2016 levels as they have every month of 2017. The latest report shows August exports were 14.7 percent higher than the same period last year. This brings the January-August increase to 14.5 percent higher in 2017 than in 2016. The total amount of beef exported in August 2017 was the largest amount of any month since July 2013. Strong international demand for U.S. beef continues to be an important factor in the beef market.

Exports to the Japan were up almost 40 percent over August of last year. Also showing large increases were Vietnam (up 113 percent), Hong Kong (up 28 percent), and Canada (up 18 percent). Direct sales of beef to mainland China were 1.1 million pounds. This made it the 15th largest market for U.S. beef as the direct market there continues to evolve after the re-opening of trade.