Beef Issues Quarterly Archive

Precipitation and Profits Signal Cowherd Expansion

by Lance Zimmerman, CattleFax


Nearly two years of record cow-calf profitability and improved forage conditions have revived the cattle cycle and led to one of the most aggressive starts to a U.S. beef cowherd expansion in recent history.


Drought still lingers in the west, but a 20-year U.S. drought cycle started to fade in May 2014. Timely precipitation all but eliminated beef cowherd liquidation in summer 2014, and non-fed cattle slaughter is down more than one million head over the last 18 months.


Precipitation continued to replenish pastures across major cow-calf producing regions in 2015, where typical annual rainfall totals were met in many regions by the first half of the year. As rainfall became more prevalent, heifer retention became more intense across the United States.

Calf values rallied to $300/cwt. in the fall as heifer retention kept seasonal supply increases manageable and demand was relatively strong with historically strong profitability in the stocker, backgrounder and feeder segments.

The result was unheard of profitability for U.S. cow-calf producers averaging around $500 per cow in 2014. Adequate forage and profitability were what the cow-calf segment needed to propel the industry into a cowherd expansion, and the segment received both coming out of last year.

With additional heifers staying on pasture and the effects of previous herd liquidations, fed slaughter has been down 1.6 million head during the last year and a half. Supplies are tight this year, but the early signs of expansion in 2014 should lead to year-over-year increases in cattle slaughter during the next 12 months. Monthly forecasts are no more than 2 to 4 percent above the year prior through that period, but the tide is shifting to larger beef supply increases by the second half of 2016 and beyond.

Current weather forecasts are calling for an El Nino pattern to continue into next year, and CattleFax expects expansion efforts to remain intact – and beef supplies to continue to grow – over the next three to five years. Cattle producers and beef processors will need to plan accordingly to manage risk as supply dynamics continue to shift.

Culling Activity Slows

The U.S. beef cow inventory is expected to grow for the second-consecutive year on Jan. 1, 2016, with an increase of more than one million head expected – totaling near 31 million beef cows. The rapid cowherd expansion mentioned earlier will have added around two million head to the U.S. beef cowherd since 2014.

To understand how extreme this herd rebuilding effort has become, the industry can look at a variety of slaughter indicators.

Beef cow slaughter is on pace to be down 350,000 head in 2015 – dropping to the smallest total since at least 1970. On a weekly basis, the 2015 U.S. beef cow slaughter will average around 43.7 thousand head per week. When adjusted to an annualized culling rate, cow-calf producers are culling between 7.0 and 7.5 percent of their herds this year.

From 2008 to 2013, U.S. cow-calf producers culled 10 to 12 percent of cow inventory each year. It was the longest, most aggressive stretch of culling in the last 30 years. The 2015 culling rate will exceed the expansion period average of 8.4 percent – becoming the smallest annual culling rate in three decades.

Heifers Are Not Entering Production

With renewed pastures, cow-calf producers are also developing heifers in search of the best herd prospects. Starting last fall, the percentage of heifer calves and feeder heifers sold in U.S. auction markets, direct sales and video auction markets dropped 2 percentage points below fall 2013 levels – averaging around 36 percent of the sales mix.

That decline is reflected in current feedyard placement trends with the July 1, 2015, percentage of heifers on feed reaching a record low 33 percent. Even fed slaughter has seen the influence of heifer retention. The percentage of heifers in the fed slaughter mix dipped to 28 percent for a summer 2015 low, and it will likely finish the year averaging 33 percent.

The influence of these numbers will translate to an additional 600,000 head of beef replacement heifers – placing the Jan. 1, 2016, heifer inventory at an expansion cycle peak of 6.3 million head. Heifer retention will remain noticeable throughout the next few years, but weakening prices will result in fewer heifers entering the herd.

Additional Beef Supplies

CattleFax forecasts a 3.2 million head improvement in beef cow inventories from the low in 2014 to the peak around 2018. The most aggressive growth is occurring now, and subsequent additions will increase the cowherd at a decreasing rate. However, the fastest growth is yet to come for U.S. beef supplies.

Commercial beef production will experience an annual decline around 2 percent in 2015 to 23.7 billion pounds. Production will transition quickly to a 3 percent increase next year. Annual increases in beef production could average 5 percent in 2017 and 2018, eventually pushing production above 28 billion pounds by 2020.

The 2020 beef production estimate would be a new record high. In fact, current models suggest beef production could be at new record highs as early as 2018 at 27.1 billion pounds. With U.S. pork and poultry production already at record highs, the importance for additional beef market opportunities will take on a renewed importance.

Combining the above production benchmarks with assumptions for a modest 2 to 6 percent annual growth in beef exports and a 1 to 5 percent decline in beef imports, U.S. per capita retail beef consumption could approach 60 pounds per person by the end of the decade. That would be the largest domestic beef consumption since 2009.


Market Implications

There is no doubt that cattle and beef prices will continue to come under pressure as supplies increase. Fed cattle and boxed beef prices already started facing resistance in 2015. Price risk in the calf market will become more prevalent during second half 2016.

When the larger calf crop reaches the market in fall 2016, cow-calf producers will experience the first signs of price weakness and leverage that favors buyers. This trend will strengthen with the expectation that cattle feeders, on average, will operate in a negative margin environment for the next several months.

Demand sustained near recent levels projects calf prices can decline 20 percent just based on supply increases alone. Retail beef demand will become increasingly important to market prices as supplies increase.

Weakness back to pre-2014 demand levels would imply calf values back to the low $180/cwt. area – a decline of 30 percent. U.S. beef demand and – perhaps more importantly – global beef demand will be determining factors in the risk cattle values have as supplies increase.

Regardless of retail beef demand changes, increasing supplies will allow retailers and restaurants to gain leverage over cattle producers during the next few years. Growing retail beef demand will be more essential for industry profitability during expansion. 

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Tags: Beef Issues Quarterly, Fall 2015, Trends Analyses

September 27, 2015