COMMENTS

Opinion
Feb 3, 2012
Market turmoil ahead

Last week’s annual cattle inventory report showed that cattle numbers were much lower than expected, down 2.1 percent from last year. The drought in the southwest can perhaps take sole responsibility for most of the decline, with Texas eliminating 660,000 cows and CROW Oklahoma removing 288,000 cows, nearly a million head in just two states.

However, many cattle were moved and many outfits in the northern and western states were able to increase cattle numbers. Still, at the end of the day, beef cow numbers are the lowest since 1962 and total cattle numbers are the lowest since 1950. We’re down to 29.88 million beef cows, which is 3.1 percent lower than a year ago, the largest single year decline since 1986 when we experienced a 4.7 percent decline in one year.

Beef cow numbers have declined 12 out of the last 14 years, which makes one wonder who is going to step up to the plate and take advantage of the opportunities that lie ahead in the cow/calf sector. One aspect of the report that was interesting is that commercial cattle slaughter has declined 6.8 percent since 1996 but beef production has grown by 3.1 percent, showing just how efficient the industry has become. Better management, genetics, feeding protocol and nutrition have all played a role in producing an average carcass weight of 850 pounds and helping the U.S. cattle industry remain a global competitor.

One surprise in the report was beef heifer retention was up. Beef producers have 1.4 percent more replacement heifers, 5.212 million head to be exact, and some analysts are calling it a positive signal for herd growth. We have heard and seen a lot of anecdotal information about increased heifer retention this fall, but, the drought in the southwest seemed to quell many of those ideas. Where there was feed, there were more cattle.

Last year, the beef industry slaughtered nearly 3.8 million beef cows and with 5.2 million replacement heifers going back into production, we may start to see beef cow numbers begin to rise. With the price of feeder cattle, there has never been a better signal to increase beef cow numbers and as we’ve said for the past several months, the value of all classes of cattle is likely to stay relatively strong for several years.

Low cattle supplies have put a good foundation underneath many cow/calf operations, although we still have a demand situation that is perplexing at best. Exports have come in and saved the market for now and they are expected to remain steady going forward. Retail beef prices are going to need to go much higher to provide sustainability to other sectors of the beef industry. There is a huge price disparity between feeders, packers and retailers. This will start to create some problems in the near future.

Packers have started reducing slaughter rates and it looks like a weekly kill of 620,000 head may be as good as it gets for a while. The futures markets have shown no cover on fed cattle going forward.

Steve Meyer, CME Group economist, said in the Daily Livestock Report that, “The beef [industry is in] a capacity-driven situation. The beef packing sector has been over-sized relative to cattle numbers for some time. Some reconciliation has occurred over the past few years but there is more capacity than can be profitably supported, and that situation is going to get much worse over the next 18-24 months.” You could also add feeding capacity to the equation.

Meyer said, “This margin situation has been brewing for some time as well. Meat margins for beef packers has been negative for the majority of weeks since mid-2010. This situation has become critical since Oct. 1 when the beef margin hit a negative $105.89 and the low was Christmas week with a negative $123.59. There are more cattle in feedlots than a year ago but the placements of lightweight cattle have made it difficult to predict the flow of market ready cattle. Prices are evidence that market ready supplies of cattle are tight and they will get even tighter.”

If retail beef prices don’t climb higher and cover the cost of production, the market will more than likely show us lower cattle prices that are in line with the consumer’s ability to purchase. Something is going to give in the markets. Lower inventory may not lead to higher prices. — PETE CROW

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