Timing Bred Cow & Heifer Sales

The graph above is from a recent study and publication led by Tori Marshall, a graduate student in the Department of Agricultural Economics at MSU. Her research used data collected from cattle auctions in Mississippi during 2014-2015 to estimate the impact that pregnancy status has on value.

One of the interesting findings of the study is that pregnant cows or heifers sold at a discount, on average, to open females until they crossed the 5 months pregnant threshold. Females with a calf at side averaged higher than either open or bred females. Retention costs were also considered in a separate graph in the publication to account for the additional costs a producer would incur by holding the cattle longer. The research showed a clear value in knowing whether the cow or heifer is pregnant before selling. Below is a segment from the conclusions

“Mississippi State University research results suggest that waiting to learn the pregnancy status of replacement-quality females at the auction is a pure gamble and reduces expected profit. Producers who opt to pregnancy-check on the farm are better situated to take advantage of improved profits by selecting the best time to sell. Optimal sale timing depends on the producer’s retention costs and the timing of pregnancy check. A producer with relatively low retention costs can optimize profits by selling a cow-calf pair, regardless of when pregnancy is confirmed. However, if retention costs are relatively high, the producer should consider pregnancy checking and selling early in gestation unless the female is later into gestation. If this is the case, just as when retention costs are relatively low, the producer is better off waiting to sell a cow-calf pair. Pregnancy-checking early in gestation also allows the producer to sell immediately if the female is found to be open and, therefore, avoid additional retention costs.”

The sales data were collected in 2014-2015 when cattle prices overall were very high. We expect that the results would be similar today, but at lower price levels.

To view the full (4-page) publication, Click Here.

This post was co-authored by Tori Marshall, M.S. student in Agricultural Economics.

State Level Beef Cattle Inventory

 

 

The January 1 USDA Cattle report released two weeks ago is the most comprehensive inventory report for state-by-state inventories. It provides the best snapshot of the beef cattle industry over time. In this article, we are going to dig in on some of the Southeastern states and look at recent trends We’ll also discuss methodology. The first map above shows the number of beef cows on January 1 by state and the second map shows the change in beef cows since last year.

I think it is important to first briefly mention the methodology USDA uses to collect and estimate these numbers. The inventory numbers are based on survey responses. These surveys include mail, online, and face-to-face surveys, but the primary mode is by phone. For the 2019 report, about 36,000 U.S. producers were surveyed. Since not all producers are surveyed, there is sampling error to consider (this is similar to political polls) and the goal is to minimize the error. Overall, the estimates are not perfect, but they are very good and by far the best publically available.

Looking at the first map, it is no surprise that most of the cows in the U.S. are in the middle of the country. Texas is the largest at 4.7 million head which more than doubles 2nd place Oklahoma for the number of beef cows that have calved. Most of the Southeastern states fall into the lighter shade of green category with between 459,000 and 935,000 head of beef cows.

The second map shows that the Southeastern states were split between small expansion and small contraction for the number of beef cows. Florida was the biggest gainer while Mississippi showed the biggest decrease. The map also shows that in general, the bigger states got bigger while it was a mixed bag for the other states. Missouri, Montana, and Kentucky were the only states in the top 10 to have lower beef cow inventories when compared to last year.

Mississippi ranks 26th for the number of beef cows that have calved at 477,000. This was down 24,000 head from a year ago and had the largest percentage year-over-year decrease of any state with more than 15,000 beef cows. That sounds bad until you consider that the 2018 report showed Mississippi had one of the largest percentage increases when compared to 2017. I suspect the previously mentioned sampling error comes into play here because I don’t see much evidence for a 5 percent growth during 2017 followed by a 5 percent contraction in 2018. Over the past 12 years, the lowest Mississippi beef cow inventory year (468,000 in 2015) and the highest inventory year (503,000 in 2010) were only 35,000 head apart. Looking at the longer trend, steady is the term to use for Mississippi beef cow numbers.

Slowdown in U.S. Cattle Inventory Growth

The USDA Cattle report was released last week and it showed an estimated 0.5 percent growth in all cattle and calves for a total of 94.8 million head in the U.S. on January 1, 2019. The U.S. calf crop estimate of 36.4 million head showed 644,500 (1.8%) more calves were born in 2018 than in 2017 which marked the fourth consecutive year of calf crop increases. This report was mostly the expected mix of slight growth and hints of lower growth in the future. A larger calf crop in 2018 implies beef production will again be higher in 2019 and likely into 2020 but the cow and heifer numbers point toward smaller increases in calf crops in the future.

The inventory of beef cows was 31.8 million head which was up about one percent. However, the number of beef replacement heifers was down 3 percent from January 1, 2018 at 5.9 million head. This left beef replacement heifers at 18.7 percent of the total beef cow herd which is the lowest level since 2013, but still above herd contraction levels. Only 4 of the top 25 states showed year-over-year increases in the number of heifers for beef replacement. It is likely that we are near the end of the herd growth phase of the cattle cycle though it is worth noting there is not yet clear evidence of entering a contraction phase as calf prices remain at profitable levels. A shift higher in prices could push more expansion while lower prices in 2019 could lead to contraction.

A look at the state-level estimates shows the majority of growth in the beef cow herd can be attributed to three states: Texas (+135,000), South Dakota (+67,000), and Oklahoma (+62,000). Combined, these three states saw beef cow herd growth of 264,000 head and were major contributors to the U.S. beef cow herd growth of 299,500 head. One difference between these three states is that South Dakota and Oklahoma have surpassed their 2010 beef cow inventory levels while Texas is about 485,000 head lower. Texas (-9.4%), Montana (-1.2%) and Kentucky (-5%) are the only states in the top 10 of beef cow inventory with lower cow herds than in 2010.

These inventory responses generally align with market performance over the past two years: prices have been strong enough for nearly flat or slow expansion but not high enough for the rapid expansion seen just a few years ago. We are not yet talking about herd contraction, but we are unlikely to see large calf crop increases the next few years without a large and sustained price rally.

USDA Cattle Supply Reports: Round 1

USDA is catching up on lost time by releasing reports originally scheduled during the shutdown. Last week, the January Cattle on Feed report was released. This week, the annual USDA Cattle report will be released on February 28th. Then, the February Cattle on Feed report will be released on March 8th followed by the March Cattle on Feed report on March 22. Altogether, USDA will release three (normally) monthly Cattle on Feed reports and one annual Cattle report in a 30-day span. These reports are pieces of the supply side of the equation when trying to forecast prices.

The January Cattle on Feed report released last week estimated the feedlot activity during December 2018. Placements were the surprise of the report as the came in 1.8% lower than a year ago when the general expectation was for a 2% increase. It seems that weather and muddy feedlot conditions kept placements lower than would have been seasonally expected. Weather is definitely impacting at least some of the cattle flow this year. One impact at this point on markets at this point is that weather is impacting the flow of cattle into feedlots. This is seen in the lower placement numbers than seasonally expected during the last months of 2018. That can at least in part be attributed to poor feedlot conditions. December was the fourth consecutive month with placements lower than the year prior. This will affect the supply of market-ready cattle in the Spring months and also probably suggests larger placements of cattle this Spring. It seems the futures market is paying attention to this as the April and even June Live Cattle contracts are trading at a pretty significant premium to the August contract.

 

The January COF report is mostly positive for prices, but likely doesn’t really move the needle much because of the delay. We are just now getting information on what happened in December. The true value in this report is that it sets a baseline for expectations for the February report to be released next week.

The USDA Cattle report coming this week is perhaps the most important to producers in the Southeast. It is the most comprehensive cattle supply report released throughout the year. This is the report that estimates total cattle inventory and breaks down inventory by state and class as of January 1, 2019. It will also provide a Cattle on Feed number for all feedlots, not just the 1,000 head or above like we get in the monthly reports. The large majority of analysts are calling for a close-to-flat cow herd growth during 2018. Any deviation from that would be a pretty big surprise. I’m looking forward to that report for many reasons including the estimates for herd changes within states.

 

Heifer Price Seasonality

Last week we looked at steer price seasonal patterns in Mississippi (view that post HERE). This week, we are examining the same story but for heifer prices. The back story from last week about why seasonality matters is the same for heifers as it is for steers. Rather than repeat it, I’m going to focus on some seasonal differences between steers and heifers.

The graph above is a seasonal price index that shows 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.

Mississippi heifer prices over the past 7 years in Mississippi generally follow the same pattern as steer prices – higher prices in the early Spring months and lower prices in the Fall. A few key differences stand out though when we look at specific weight classes. The percentage range is larger with heifers for some lasses. 500-600 pound steers range from 7% higher than average in March to 8% lower than average in October. For heifers, the range is 6% high and 12% low — an 18% range in a “normal” year. The length of time those five-weight heifers are seasonally lower on average also lasts longer than for steers as November is even lower than October. The “Low” for each weight class is lower for heifers than it is for steers. Remember, these “Lows” are relative to the annual average price for each sex.

There are a few caveats that are worth mentioning here. In general, there are more steers sold in each weight group than heifers and thus the price data each week is probably a little accurate for steers than heifers. If there are few heifers traded in a week but those few are really good (or bad), that can strongly influence those prices. Because this analysis was done over seven years, those issues are outweighed by values other years and no single week has a huge impact on the index.

Calf Price Seasonal Patterns

The fundamentals of cattle markets in 2019 do not currently send a clear higher or lower signal for calf prices this year. Larger supplies but great beef demand have kept calf prices in a pretty close range the past two years. That is still the story in early 2019. An unexpected shift could happen; but droughts, changes in the overall economy, etc., are nearly impossible to predict far into the future with any level of accuracy. But in years where there is not a fundamental push (an example would be the low-supply-driven surge in prices in 2014-2015), market seasonality is often the biggest driver of price changes throughout the year.

Calf prices are dependent upon prices around the country. Feedlot demand for steers and stocker demand for steers are both important drivers of the feeder markets. Also important is the timing of when most cattle are weaned and hit the market – usually during the fall months.  If these factors cause prices to behave similarly throughout each year, a seasonal price index can be used to estimate the impact that the time of year can have on cattle prices.

To examine this, we can calculate a seasonal price index that shows 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.

Mississippi steer prices over the past 7 years in Mississippi have followed a seasonal pattern of higher prices in the early Spring months and lower prices in the early Fall. We are approaching the seasonally high months of the year for Mississippi and Southeastern calves. The seasonal lows for 500-800 pound steers usually come in the Fall when the largest number of calves are being sold. For 500-600 pound calves, prices in October are nearly 10 percent lower than the annual average – and about 15 percent lower than March prices, on average. These seasonal patterns are worth watching this year. How high the peak is in the Spring is another piece of information to use when projecting calf prices during the Fall.

Bred Cow Values Lower in 2018

The following commentary is a mix of my own commentary and that from the Livestock Marketing Information Center. 

Bred cow prices at auctions during the last quarter of 2018 were down 10-20% from a year earlier in key cattle production regions. USDA’s Agricultural Marketing Service (AMS) reported average prices in Georgia auctions for 1200-1300# cows bred 4-6 months earlier at $912.30 per head in December versus an average price in December 2017 of $1119.89, a 19% decline. The same comparison in Montana for mid-aged 1200-1300# bred cows showed a 6% price decline in December compared to a year earlier. Not surprisingly, Midwest auction cow price changes from late 2017 to late 2018 posted a drop between that of Montana and Georgia, as Saint Joseph, Missouri prices were down 15%. Female prices in Mississippi have been following a similar trend as shown in the chart above.

Interest in purchasing breeding stock has been cautious relative to current spot and futures market pricing for calves and yearlings. Steer calf prices in Oklahoma City during December were only 4% lower than a year ago. Feeder cattle futures prices for delivery in November 2019 were 2% higher in December than one year earlier. In mid-January, the November feeder cattle contract closed at $149.85 per cwt .versus $144.93 a year earlier. The LMIC is projecting Southern Plains steer calf prices (500-to 600-pound steer) in 2019 to average $167-$174 per cwt., which compares to the 2018 calf price average of $171.39. The forecast for yearlings (700-to 800-pound steer) is $145-$150 per cwt., providing a reference point for current futures market values. The yearling price for 2018 was $150.

Average annual (2018) bred cow (or replacement cow, per the St. Joseph, MO auction market quote) prices reported by AMS dropped to the lowest levels in five years. In some markets, prices declined back to averages last seen in 2010. St. Joseph, MO is the case in point, where drought last summer in northern Missouri led to some forced liquidation of herds. At the time of those lower bred cow prices (2012-2013), the beef cow herd was shrinking at a 2%-3% annual rate and the number of beef heifers being retained for breeding purposes was 20% lower than in 2018.

Purchasing a bred cow or any type of female is usually an investment in the future with the goal of earning revenue from her calves. The current lower bred cow and pair prices imply it will not require exceptionally strong feeder calf prices over the next few years for many of those cows to be profitable investments.

Missing Reports

This week’s article (below) comes from Dr. Brenda Boetel at the University of Wisconsin-River Falls. I have lightly edited it to add more information. I found it to be an interesting example of the value of information. In the senior-level Commodity Futures Marketing course I teach at MSU, we spend a few weeks discussing how markets work and what it takes to ensure they are efficient. One necessary ingredient is information. All of the good things that come from competitive markets rely on a substantial amount of readily and commonly available information. Long periods without information is more likely to lead to more volatile markets. 

Last week appeared to bring no movement toward a resolution regarding the partial government shutdown. As such, several reports were not available, including the World Agriculture Supply and Demand Estimates (WASDE), Quarterly Grain Stocks, and weekly export sales. Next week will see the absence of the Livestock Slaughter and Cattle on Feed report, and if this shutdown goes into February, the January Cattle (Inventory) report will be affected.

The markets will continue to make assumptions about the content of these missing reports. The longer the lack of information prevails, the greater the market correction may be when the reports resume, especially if the reports say something different than the market assumed. The cattle markets care about last week’s missing reports because they gave the final information on the size of the 2018 corn harvest, the speed in which corn is being used, and the first hint of information regarding how many acres of each crop will be planted in 2019. The market is trading on old-information, a less-than-desirable situation.

The WASDE report likely would have shown a decrease in 2018 corn yield. Additionally, poor harvest conditions affected acreage as well as yield. The USDA would likely have lowered 2018 corn production from 14.626 billion bushels to around 14.545 billion bushels. The February report will begin to adjust the demand side of the equation and examine more closely whether usage estimates for ethanol or exports needs to be adjusted.

Corn demand appears to be strong, with exports appearing to be greater than USDA expectations and feed and residual usage likely up. Ethanol production has been low, but strength in other usage likely makes up for the lower ethanol production. The overall impact of these demand factors would likely have USDA keep usage constant in February.

As the year progresses, we will need information on acreage intentions to get a glimpse into long-term corn prices, but for now, expect corn price to continue to behave seasonally and increase until mid-April/early-May.

 

Cattle Auction Receipts

Approximately 323,000 head of cattle ran through Mississippi auctions in 2018 according to data from the Mississippi Department of Agriculture and Commerce and the USDA Agricultural Marketing Service. This was down about four percent from 2017 but about four percent higher than the 2012 to 2016 average. Sales in the early months of 2018 were lower than during the same months of 2017 as shown in the graph. This was likely impacted by the low calf prices in late 2016 which led many producers to hold their calves until prices recovered.

While these numbers are for all cattle, the data also allow for a little more detailed look at specific classes. More than half of the cattle were steers with a 2018 total of about 185,000 head. That was down about six percent from 2017 – but again remember that 2017 likely included more carryover calves from 2016. On average, about 57 percent of the cattle sold at auctions for a given week were steers. Most cattle sold were calves with 65 percent of receipts being for cattle weighing less than 600 pounds.

Cows accounted for about 12 percent of auction sales in 2018 with total sales at approximately 38,000. This number includes only cull cows. The 2018 total is about the same as in 2017, but it is interesting to note that 2018 cow sales were 13 percent greater than the 2012-2016 average.

August, September, and October are the primary selling months in Mississippi and around the U.S. October saw the most volume in Mississippi in 2018 with 43,000 head sold. February and March are usually the slower months of the year. That is likely to be the case in 2019 since there was not a lot of price pressure in the Fall to encourage producers to hold calves until the spring.

Beef Cattle Market: Year in Review and a Look Ahead. Pt. 2: Demand

Happy New Year! This week’s article is part two of a two-part Supply and Demand series that began before Christmas. You can find Part 1 by clicking HERE

Domestic Beef Demand
While the larger supplies discussed in Part 1 will remain the biggest headwind to stronger prices in 2019, strong domestic and international demand for U.S. beef is continuing to provide price support. A strong domestic economy is supporting beef demand despite the larger supplies of beef and also larger supplies of other proteins chicken and pork. Domestic beef consumption per person in 2018 was about 57 pounds and is forecasted to grow another half-pound in 2019. This increased consumption occurred at similar to higher beef prices than a year ago. U.S. restaurant performance was also strong in 2018 with indicators suggesting an expanding restaurant industry most of the year.

International Beef Demand
While domestic demand can be classified as strong, international demand for U.S. beef has been superb. Internationally, robust exports have supported the demand profile for beef and, therefore, cattle. Beef exports have risen by over 20 percent over the past 2 years which has helped absorb some of the beef production increases. This includes an estimated 11 percent increase in 2018. Japan remains our largest export partner, but exports to South Korea have increased rapidly to claim the 2nd spot. Beef exports to South Korea are up 40 percent year-over-year based on the latest trade data. Overall, more modest export growth is forecasted for 2019, but it is worth noting that the modest forecasts the past two years have been sharply exceeded.

Summary
Beef demand has been and continues to be excellent which is providing some cattle price strength despite larger supplies. The past few years have been a demand-driven environment where stronger-than-expected beef demand has led to stronger-than-expected calf and yearling prices. The past few years have been important transition years that coped with the sharp supply increases. The slower herd growth numbers begin to paint a brighter price picture for 2019 and 2020 if domestic demand and exports continue to grow.