To follow up on last week’s article (available HERE), this week we’ll dig a little deeper into the beef production picture. This week’s article comes from Dr. Derrell Peel at Oklahoma State University. It sheds some light on the increased role of heifers in the total beef production system. Total cattle slaughter has outpaced year-ago levels for most of 2018. The mix of steers and heifers plays an important role in the total amount of beef produced because heifers are generally lighter than steers. However, as Dr. Peel points out below, the gap between heifer weights and steer weights has shrunk. Heifer dressed weights for the past 12 months averaged just 7.5% lighter than steer dressed weights. Continue reading for a more in-depth analysis of the growing role of heifers in beef production.
The heifer contribution to beef production depends on both heifer slaughter and heifer carcass weights. Heifer slaughter varies cyclically with additional heifer retention during herd expansion and reduced retention during liquidation, thus providing much of the variation in beef production in cattle cycles. Heifer slaughter as a percent of total steer and heifer (yearling) slaughter has averaged about 37 percent on an annual basis for the past 45 years, though heifers averaged less than 30 percent of yearling slaughter prior to 1965.
During periods of herd expansion, the heifer percentage of yearling slaughter drops to roughly 31 percent and during periods of herd liquidation, heifers will contribute about 40 percent to total yearling slaughter. Most recently, a twelve month moving average of monthly heifer slaughter percentage bottomed at 31.4 percent in mid-2016 during aggressive herd expansion. Back in 2001, cyclical liquidation of the beef herd resulted in a heifer slaughter percentage of 40.3 percent. Most of the period from 1995-2013 was herd liquidation and the average heifer percentage of yearling slaughter was 38.2 percent. The beef cow herd expanded from 2014 -2017 and the heifer slaughter percentage averaged 33.4 percent during that period. Most recently, heifer slaughter has increased to an annual average of 34.3 percent of yearling slaughter as heifer retention slows down.
The evolution of heifer carcass weights is even more interesting. Both steer and heifer carcasses have trended up for about 50 years. For example, heifer carcasses averaged 564 pounds in 1967 and 811 pounds in 2017. Heifer carcass weights have increased relative to steers over that period. Heifer carcasses averaged 84 percent of steer carcass weights until the 1970s; reaching 85 percent consistently by 1978. Heifer carcasses reached 86 percent of steers weights by 1982 and in just five years, from 1982 to 1987 shot up to 90 percent of steer carcass weights. By 1993, heifer carcasses were 91 percent of steer weights and by 1996 were 92 percent of steers. The percentage hovered around 92 percent until 2009, when it reached 92.2 percent, and increased to 92.3 percent in 2010. Heifer carcass weights have continued to inch up relative to steer weights. In December, 2017, the annual average heifer carcass weight reached 92.4 percent of steer weights for the first time and in the most recent months of February and March, 2018, the twelve month moving average of heifer carcass weight as a percent of steer carcass weight was a new record of 92.5 percent.
Clearly, the industry continues to feed heifers more and more efficiently over time. There may, however be a downside. Research at Oklahoma State University has shown that big carcasses lead to big beef cut sizes which may limit demand. Anecdotal indications from the industry suggest that for a number of years, some markets for beef products have specified heifer sources to ensure smaller product sizes. The problem now is that heifer carcass weights in 2018 are the same size as steer carcasses were in 2005. Heifer carcass weights appear to have provided a buffer against big steer carcasses for the past decade or more but that may be coming to an end. It may be that cattle and carcass weights can physically continue to get bigger but there is a very real question of the demand implications and economic consequences of continued growth in steer and heifer carcass weights.
2018 U.S. commercial beef production is forecasted to total 27.43 billion pounds according to the most recent USDA estimates (full USDA report available HERE). This would be the largest annual total on record as it would beat the current record-holding year 2002 by about 350 million pounds. This would be a 4.8 percent increase over the 2017 total and a 15.8 percent increase over the 20-year low point observed during 2015.
The 2019 forecast is even larger at 27.87 billion pounds. This would be a relatively modest 1.6 percent increase over the 2018 forecast. However, the forecast for 2019 would cap off the largest 4-year increase in beef production since the mid-1970s. A 2019 total of 27.87 billion pounds would be 4.2 billion pounds or 17.6 percent above 2015 levels. For comparison, beef production also grew by over 4 billion pounds and over 17 percent during the 1990s herd expansion. But, it took 10 years to accomplish the feat during that expansion.
At the start of this year, we discussed beef exports as a key question and component to how markets will behave in 2018 (see HERE). With the release of the March export data, we now have the first quarter of that question and the results are encouraging. Beef and veal exports during the month of March totaled approximately 260 million pounds. This is an 11.4 percent increase over March of 2017 and it follows increases in January and February. Year-to-date, exports are 12.2 percent higher than the first quarter of 2017.
This is encouraging news because export totals were large in 2017, too. So, the increases this year are in addition to what were viewed as big numbers from last year. South Korea was the second largest export market during March with just over 49 million pounds. This is a 38 percent increase over March of 2017. Japan was again the number one market with 75.6 million pounds which was about 1.6 percent above March of 2017. Exports to Mainland China totaled about 1.2 million pounds.
The continuation of strong exports is welcome news to the U.S. beef industry in this time of larger supplies. In 2017, larger than expected export totals lowered the amount of beef disappearance per person in the U.S. which provided some support to beef prices. Whether or not that will be the case for 2018 remains to be seen, but the first three months have been a good start.
This week’s analysis comes from the Livestock Marketing Information Center (LMIC). LMIC is comprised of member Land Grant Universities and agencies across the U.S., including me as the representative from MSU. We have discussed Mississippi price seasonality before (see HERE and HERE). The information below is pulled from a much longer price series in Western Kansas than is available in Mississippi. The seasonal patterns in Kansas (and most states) is very similar to the seasonal patterns in the Southeastern states. The article below discusses how supply impacts seasonal cattle prices. Specifically, in times of larger calf crops like we are currently seeing, calf prices in the Fall are generally the lowest of the year. This puts an emphasis on risk management for those weaned calves that are planned to hit the market in October or November.
Many producers now have calves on the ground, so it’s a good time to discuss prices and to update marketing plans for the new-crop. Calf prices are expected to behave certain ways within a calendar year because of the seasonal production cycle. The majority of the U.S. is weaning its calves in the fall, and many of those animals head straight to market forming the 500-to 600-pound calf market and setting prices for yearly lows in the fourth quarter. Analysis of this seasonal pattern places the highest prices in March and April. LMIC has data for the Western Kansas Auction dating back to 1973, allowing for a full 40 years’ worth of observation of this weight class of cattle. However, it’s important to keep in mind, genetics and focused management have allowed for calves to be weaned at heavier weights. Weaning a 550-pound calf was not always the norm.
Over time this auction market has had small changes, but the latest ten years have proven quite volatile. Using the seasonal index for individual years, the 2014-2016 years set the 40-year maximum and minimum index value for October, November, and December. Beginning in 2014, the U.S. started a new cattle inventory cycle, and herd grew 0.7% in 2015, after seven years of year-over-year declines. The following year (as of January 1, 2016), cattle numbers (all cattle and calves) jumped-up over 3%, and in that October and November seasonal indexes dipped to the lowest values in 40 years. U.S. cattle numbers had not grown that aggressively since the early 1970s. The average upcycle inventory increase is about 1.6%, and the average down cycle year-over-year change is close to 2.0%.
Currently, the U.S. is in the second longest herd expansionary phase since the cycle that began in 1976, posting four consecutive years of annual inventory growth. Larger calf crops tend to put downward pressure on prices, particularly in the fourth quarter. January of 2018 showed another 0.7% increase compared to the previous year, which would indicate that 2018 fall calf prices should be again the low price point during this calendar.
So far in 2018, prices have been to slightly higher of the where seasonal indexes would suggest, up 3.2% for the first quarter of 2018. Higher than normal prices are not expected to hold through the year. The ten-year seasonal index indicates more potential downside than upside moving through 2018.
Placements into feedlots during March were lower than they were during March of 2017. While this was anticipated, it breaks a run of 12 consecutive months of placement increases. Placements were 9.3 percent lower than during March 2017. This is not an indication of fewer total cattle supplies, but rather are a confirmation of the change in feedlot timing in recent months. Larger placements in recent months have built up feedlot inventories and decreased the number of cattle available to be placed during March and April.
Even though placements were lower than last year, the number of cattle on feed is still a historically large number. At 11.73 million head of cattle on feed, this is the largest April 1 total since 2006 and the second largest on record since data began to be collected in 1996. Again, the placements number is a little misleading. It does not imply there are fewer cattle, it just implies that a lot of cattle entered feedlots sooner. This is evident by the large number of cattle on feed.
The marketing rate was also lower, though this was influenced by there being one less marketing day during March of 2018 than March of 2017. However, marketing rates have underwhelmed as of late and were lower during March of 2018 than the same time period of 2017 and 2016.
The last few months have seen a pretty sharp run-up in the number of cattle on feed for longer periods of time. As shown in the figure above, the number of cattle on feed longer than 120 days is significantly above 2017 levels – about 23 percent higher. This number was relatively low in 2017 when feedlots remained current. This year, feedlots have more cattle that are market ready or near market-ready which has led to lower price expectations for the summer months.
China announced last week that U.S. beef is one of the many products on which they will increase tariffs by 25 percentage points. The tariffs would raise the current tariff on U.S. beef products from 12 percent to 37 percent (see more details here). This is all part of the ongoing trade tit-for-tat in which the U.S. and China are currently engaged. Including beef, China listed 106 U.S. products that will be subject to a 25 percent increase. Approximately one-third of the products targeted are agricultural products.
China’s announcement came as retaliation to a U.S. proposal that would impose 25 percent tariff increase on imports of about 1,300 Chinese products – a total value of about $50 billion. The U.S. tariffs were proposed in reaction to the findings of the USTR 301 investigation and the alleged theft of American technology. Even more recently, President Trump asked the U.S. Trade Representative to consider an additional $100 billion in tariffs against China.
It is important to point out that these tariffs have not been enacted – they are proposed. A hearing on the tariffs imposed by the U.S. is set for May 15th. After that, up to 180 days is allowed for a final decision by the administration. It is possible that this could all get worked out before these tariffs are actually enacted.
While additional tariffs are certainly a bad thing for U.S. cattle and beef producers, it is a mistake to point to this development as the sole reason for declining market conditions over the past few weeks. Expected larger supplies are still the primary driver for lower prices. More so, mainland China has not yet become a major destination for U.S. beef. U.S. beef exports to China just resumed last June, and it will take a while for that market to fully develop. As shown in the figure above, the amount of beef we export to China is still small compared to Japan and South Korea. However, trade issues can hinder the growth of U.S. beef in China.
The impact of the tariffs on beef is pretty easy to grasp. They would make U.S. beef more expensive in China. This would likely slow the growth of the U.S. beef sales there. Also important are the indirect effects of the tariffs on other products. Pork is a prime example. If less pork is exported to China, it may end up with a lower price on the U.S. market – next to beef on the shelf. Perhaps the biggest underlying story in both beef and pork is that we are already dealing with large supplies here in the U.S. Exports are always important, but especially when beef and pork production is growing like it has the past few years. If the tariffs are imposed, that will likely decrease the amount of pork and beef that we export to China. That meat will either end up on the U.S. market or it we’ll try to find another outlet for it. Either of those options leads to lower value for producers.
Mississippi Farm Bureau and Mississippi State Extension Service are teaming up to host a Livestock Marketing Risk Management workshop on April 24, 2018. This workshop is designed to provide ranchers, livestock producers and others engaged in the livestock sector with an introduction to tools for managing marketing risks. This workshop will focus on budgeting and break-even analysis, futures and options, price basis risk, livestock and forage insurance, market fundamentals, and hands-on exercises.
This workshop is free to attend and will be held at the Mississippi Farm Bureau Building in Jackson, MS. Please RSVP to Bill Herndon to assist in meal planning at email@example.com or 662-325-0249. The full schedule is available at the link below.
The latest Cattle on Feed report released last Friday continued the trend of larger placements and a larger number of cattle on feed. Placements were 7.3% or about 123,000 head greater in February 2018 as compared to February 2017. Meanwhile, marketings were up only 1.6% above year-over-year. The report showed a total of about 11.7 million head of cattle on feed in feedlots with at least 1,000 head capacity. This is 8.8% above March 1, 2017 and is the largest total for any March 1st since 2006.
While placements were up yet again, the primary concern is the pace of slaughter. Slaughter rates the past three weeks have been about 2 percent lower than the same time last year as pointed out in the latest Daily Livestock Report. The chart above shows fed cattle marketings as a percentage of the number of cattle on feed. This percentage in February was below the five-year average. If lower slaughter rates continue, coupled with the known increases in the number of cattle on feed, concerns arise about a large number of market-ready cattle in the coming months.
Why does a potentially large number of market-ready cattle matter to producers with no stake in live cattle? A bottleneck at any level of the beef production chain is generally a bad thing for producers. Calves from cow-calf country ultimately end up in the feedlots – even if they trade hands a few times on the way. An efficient marketing pace ensures that market-ready cattle are moved out and space frees up for new placements to move in. A large supply of market-ready cattle all at once can lead to low live prices due to excess supplies and those cattle may stay in feedlots longer. This can have two primary negative effects on feeder cattle prices. First, more market-ready cattle waiting in feedlots can lead to less feedlot demand for placements. Second, lower live prices lead to lower breakeven prices that feedlots can pay for feeder cattle.
The trend over the past month in feeder cattle futures prices has been negative (bearish) for the April, May, and August contracts. This follows a month-long increasing (bullish) trend to start 2018.
A quick futures refresher: the prices associated with each contract above come from the futures market. Futures contracts are exactly what the name implies: a contract for something at some point in the future. These contracts expire during the contract month. So if you purchase an April 2018 feeder cattle contract at the current price of around $140 per 100 pounds (cwt), you must to sell or settle that contract sometime before or on the last Thursday of April. Unlike some contracts where you can deliver the physical commodity to settle the contract, feeder futures are cash-settled.
The structure of futures contracts allows for market participants (i.e. hedgers and speculators) to take positions on prices in the future. If you think that price will be higher in late April than the current price, then you can buy a contract and hold it hoping it will go up. If you think it will be lower, you can sell a contract and hope it goes down. It can also be used as a risk management tool for producers wanting to minimize price risk. If you purchased a load of stockers that you plan to hold until May, the futures market can be used to hedge by selling a May contract (50,000lbs). If prices go up, that’s bad for your futures contract but good for your stockers. A hedge swaps price risk for basis risk (i.e. the difference in cash and futures prices). To calculate basis for any given time period, just subtract the closest-to-expiration futures price from your local cash price.
A key benefit resulting from futures markets is that it allows forecasts based on market information. The current price for the August 2018 contract of $145 is the market’s estimate of what feeder cattle prices will be on in August. We can take that price, add in the estimated local basis, and arrive at a market estimate of cash prices. Using Mississippi as an example: the average basis (cash minus futures) during the month of August over the past five years has been about -$17 per cwt for 700-800 pound steers. If we expect that to be true this year, then the current August 2018 futures price suggests a forecast of $128 for those steers in August of this year. The same process can be used for other contract months, too.
The bearish trend of late is a signal of concern of feeder price weakness as we approach and enter the summer months. The same May 2018 contract that was worth $152 on February 16th was only worth about $139 today.
The boxed beef cutout value added to its rally with another strong week last week. The weekly weighted average for choice beef was $221.18. This is up $4.65 over the previous week and up nearly $13 over two weeks ago. As you can see in the chart above, 2018 value has been above 2017 values for every week so far. This continues to tell the story of strong beef demand. You may recall the sharp Spring rally in the beef market that occurred last year. While the current value is above year-ago levels, market fundamentals are a little different this year.
The BBCOV is reported by the USDA Agricultural Marketing Service and it provides an overall performance indicator for the fabricated beef industry. It is an estimate of the dollars per cwt for a fabricated carcass. It is not an observed price for an entire fabricated carcass sold in boxed form. Rather, the BBCOV estimates the value of a beef carcass based on prices paid for individual beef items from the carcass. Values of primal cuts (i.e. Rib, Chuck, Round, Loin, Brisket, Short Plate, and Flank) are calculated from prices paid for sub primal cuts. The BBCOV is then calculated using the estimated value for each primal and the average industry cutting yields.
As we discussed in last week’s article (available HERE), the magnitude of the 2017 Spring rally may be harder to attain this year due to the timing of larger supplies. Larger beef production is expected during the second quarter of 2018 than in 2017 which will provide more product for retailers to purchase. The Livestock Marketing Information Center projects a 6.3 percent increase in the amount of beef production during Q2 of 2018 as compared to Q2 of 2017.