Corn and Feeder Cattle Prices

Corn prices have been on a sharp downtrend since late May due primarily to a combination of trade uncertainty and a strong start to the growing season. Both nearby and new crop corn futures prices have tumbled by over 40 cents or approximately ten percent. The December 2018 corn futures contract price hit $4.26 on May 23rd – its highest level since July 2017. Just 18 trading days later, it closed Monday at a contract low of $3.77.

Corn price is assumed to have an inverse relationship with feeder cattle prices. In other words, as the price of corn decreases, the price of feeder cattle increases. This relationship assumes that all other factors that affect price remain constant such as other feeding costs and live cattle price. The inverse relationship exists because corn (feed) and feeder cattle are the two major inputs into the production of fed cattle. As the price of corn (i.e. cost of gain) declines, the price of the other input (i.e. feeder cattle) can increase without increasing the total cost to produce a fed animal.

A 2017 study by Tonsor and Mollohan at Kansas State University (available here) highlights this relationship and estimates the impact that a change in corn price has on feeder cattle prices. Using monthly data, they found that a one percent increase in corn price reduces feeder cattle prices by about 0.18 percent. Further, they found that feeder prices have become more responsive to corn prices since 2008.

To put their findings into a current context, what might a ten percent decline in corn prices imply for feeder cattle prices? It would suggest a 1.8 percent increase in feeder cattle prices. So a decline from $4.00/bushel corn to $3.60/bushel would suggest a feeder price increase from $150/cwt to $152.70/cwt.

It is impossible to disentangle the relative impacts of factors affecting real-time price changes. While feeder prices have been on a nice uptrend over the past month, it can’t be simply attributed to lower corn prices alone. However, we know that cattle prices are certainly paying attention to the corn market and that any continued corn price weakness can help to provide support for feeder cattle prices.

U.S. Beef Exports Exceed Expectations Again

As a follow up on the international trade discussion last week, this week let’s discuss the most recent export data that was released on June 7th. Most of the analysis and comments below come from Jim Robb at the Livestock Marketing Information Center mixed with a few of my comments. Overall, beef trade around the world this year has been impressive.  For April, the U.S. and Australia lead the way regarding gains in tonnage of beef sold compared to a year ago.  In terms of value, the U.S. remained the top exporter of beef and variety meats and posted a 20% dollar-value increase compared to a year earlier.  Foreign markets for beef industry products continue to grow, especially in Asia.

Last week, USDA’s Economic Research Service (USDA-ERS) published the U.S. monthly meat and poultry trade data for April.  Those data are on a carcass weight equivalent basis.  Both beef and pork export tonnage exceeded expectations, while chicken remained lackluster.

At 254 million pounds, U.S. beef exports during April were 16% above 2017’s and the largest ever for that month.  USDA-ERS reported that the U.S. sold beef directly to 93 different countries during the month of April.  In order of size, the top six destinations were: Japan, South Korea, Mexico, Canada, Hong Kong, and Taiwan.  Year-over-year, large percentage gains occurred to Mexico (rising 31%), Taiwan (up 19%), Canada (increasing 11%), and Japan (up 9%). U.S. beef imports declined year-over-year by 6%.

While the focus of this newsletter is on beef, the pork exports are also of interest. Similar to the story for U.S. beef, U.S. pork production is increasing. Surging U.S. pork exports helped mitigate the amount competition beef faced at the domestic meat case from pork.  April’s tonnage was 548 million pounds (carcass weight basis), which was the largest monthly number ever.  Tonnage sold to Mexico, the largest market for U.S. pork, was record-large in April (182 million pounds) and increased a dramatic 41% from a year ago.

In the U.S. wholesale meat marketplace, robust exports have been a factor cushioning beef prices against large supplies.  Will that situation continue?  In the World Agricultural Supply and Demand Estimates (WASDE) issued last month by the USDA, their forecast was for U.S. beef exports in 2018 to be 3.03 billion pounds, 6% above 2017’s.  That would be the first time for foreign sales to exceed 3 billion pounds.  Year-to-date trends are on the path to reach that level.

WASDE forecasts can only incorporate “current known” U.S. policy and that of foreign governments.  Of course, in the last 30 days, the unknowns regarding trade policy and hence implication on U.S. meat exports have greatly increased.  More than just insights into actual policy changes and tariff rates are required to forecast exports.  For example, in the current world economic environment, exchange rates adjustments can have a significant impact on the price paid by a foreign buyer for U.S. agricultural products.  Exchange rates are determined by macroeconomic forces and by sectors much bigger than the agriculture and food trade sphere.  That is, exchange rates are realistically exogenous, using an economics term, to the trade of agricultural and food products.  The value of the Mexican peso could drop versus the U.S. dollar, mitigating, at least partially, the short-term impacts of any new tariffs on U.S. exports to that country. The new WASDE will be released tomorrow (June 12th) but clear-cut assessments of the trade environment may be several months down the road.

 

Trading with Neighbors

Compared to the amount of attention paid by the national media, I really haven’t devoted much time in this newsletter to talking about all of the various trade talks going on. We talked about the steel and aluminum tariffs (Available HERE) and then we talked about why China’s proposed retaliation tariffs were not the primary reason for lower cattle prices in 2018 (Available HERE). My goal with this newsletter is to talk about things important to the beef industry. Trade certainly fits that bill – and trade is probably the most asked about topic during presentations. Perhaps two articles are too few in 2018.

However, certainty is hard to come by during trade negotiations. And even though trade talks dominate the headlines, the direct impact on beef has been mostly small and difficult to measure ripple effects. Even further, beef exports have been very strong in 2018. The overall uncertainty of how all of the trade negotiations will eventually workout has likely had a bigger impact than any specific action to this point. Uncertainty can lead to reluctance to develop new partnerships if one is unsure about what the future trade rules might be.

The deal that should raise the eyebrows of those in the cattle and beef industry is the North American Free Trade Agreement or NAFTA. Negotiations have been ongoing for a while now and there really hadn’t been any explicitly negative indications other than how long the negotiation process is taking. That seemed to change last week when the U.S. imposed steel and aluminum tariffs on our NAFTA member neighbors Canada and Mexico. These tariffs added concern to the status of the ongoing NAFTA negotiations. There was even some talk last week that the U.S. might have a preference for separate deals between Canada and Mexico which would mean abandoning NAFTA.

The steel and aluminum tariffs are the same as those levied on China. But NAFTA is very different than the ongoing China trade talks for beef. China is a new market with a relatively small amount of U.S. beef flowing to the mainland. It shows a lot of promise for the future, but the market is nowhere near fully devolved. On the other hand, NAFTA is a jewel for the U.S. beef industry. According to a report by the North American Meat Institute (available HERE), Mexico accounted for 20 percent of U.S. beef exports in 2016 and Canada accounted for approximately 10 percent. Those two countries alone imported 27 percent of all U.S. beef exports in 2016 at a value of around $1.73 billion. Put simply, NAFTA has been good for U.S. beef producers and there doesn’t seem to be a lot to reasonably gain for the beef sector through renegotiation. Tariffs are already zero for U.S. beef entering Canada and Mexico due to NAFTA.

To be clear, this perspective is specific to U.S. beef. These trade deals are amazingly complex and there may be gains to be had in other sectors of the economy by renegotiating NAFTA. But specific to beef, NAFTA provides zero-tariff paths to over one-quarter of U.S. beef exports.

Heifers and Beef Production

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 – 2019 Beef Production Forecasts

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.

Strong 2018 Beef Exports Continue

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.

Calf Price Seasonality and Fall Marketing

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 Lower than Year-Ago, But Number of Cattle on Feed Still Historically Large

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.

U.S. Beef on China’s List of Proposed Tariff Responses

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.

Livestock Marketing Risk Management Workshop

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 cwh1@msstate.edu or 662-325-0249. The full schedule is available at the link below.

RiskWorkshopFlyer