Income and Meat Demand

The figure above comes from an interesting new article published in the American Journal of Agricultural Economics. The authors use consumption data for seven food categories in more than 100 countries (including the U.S.) to see how food demand changes with income and population. In particular, let’s look at the area shaded red in the figure which refers to meat and seafood. The figure shows that as income increases, consumers demand less starchy staples and more meat and seafood among others. Within this meat and seafood category is beef.

Not only do consumers demand more meat, but also more food in general. Note that at a per capita annual income of $500, consumers food demands are just below 2,000 calories per day and very little meat and seafood. For consumers with incomes greater than $25,000, demand increases to over 3,000 calories with significantly larger meat and seafood demand. Those may sound like low annual incomes to U.S. readers, but the average for the countries used was just over $15,000. Here is a link to per capita incomes around the world if you’re interested.

This research is especially insightful for beef and other protein producers. This figure explains why growing middle classes in other countries can boost beef sales. Think of a country with a low but growing per-capita income (hello China at $17,000). Now project out what demand for meat will be for that country over the next decade or more as incomes rise. The authors take a stab at this, too. They project that between 2010 and 2050, demand for meat and seafood will double due to income and population effects. While increased population matters, the biggest driver for this category is projected to be the income effect.

We’ve all heard (and probably used) the projection of needing to feed 10 billion people worldwide by the year 2050 as support for agriculture in general. However, for animal protein producers, that number is compounded by the expected rise in incomes as countries develop. This also suggests that perhaps the biggest demand growth for meat will occur outside the U.S. – in countries that have the most room to grow their income.

Abundance Feedstuffs Lend Strength to Calf Prices

This week’s article comes from Dr. Stephen Koontz at Colorado State University. I found it relevant – especially since we discussed the relationship between corn and feeder cattle prices in this newsletter a few weeks back feedstuffs (Available Here). 

Friday’s USDA NASS Acreage report showed 89.1 million acres of corn planted and 89.6 million acres of soybeans. The corn acreage is an increase from the 88.0 million acres of intentions from the March Prospective Plantings report. The record cold April transitioned into a record warm May for most of the upper Midwestern states. The slow start to planting finished on schedule and crop conditions are largely good to excellent. Harvest corn futures have decreased almost $1 per bushel and cow-quality hay is clearly abundant. The only places in the country without much pasture are south and west of southwestern Kansas. The weakening feed market has translated into strengthening calf prices relative to the fed cattle and beef market. The overall protein market outlook is much the same as the beginning of summer: there is a lot of protein to come to market through the summer and fall – and no end to the potential trade gymnastics – but calf market outlook is holding strong largely because of cheapening feed.

The higher planted acreage and good feed crop conditions were largely revealed through June. The DEC18 corn contract decreased from the low-$4s to the mid-$3s the last half of the month. Therefore, the Acreage report was probably not much of a surprise. Further, it is the week of July 4th and the majority of the corn crop will be made at the end of this week – or for certain next. It seems unlikely there will be sufficient weather surprises for the rest of the summer to strengthen the feedstuffs markets. If anything there may be delayed maturity problems with the excellent moisture in the upper Midwest and eastern Corn Belt. This will be revealed much closer to harvest and I anticipate these to be minor and local. In the end this is good news for cow-calf producers. Risk management positions might be lightened while options still have considerable time-value.

However, longer term caution is still warranted. Cattle on feed numbers, slaughter weights, and competing meat volumes all remain substantial. Beef trade volumes are strong but one wonders if this is filling the pipeline early to avoid problems later. For the short-term though, the market is revealing the abundant supplies of feedstuffs.

Hay Acreage in the Southeast


The USDA Acreage report was released by the National Agricultural Statistics Service this past Friday. This once a year report usually grabs headlines due to its estimates of acreage of crops such as corn, wheat, cotton, and soybeans. It is often one of the most volatile trading days for those commodities as markets absorb the newest information and traders adjust their forecasts for future production.

The USDA Acreage report was released by the National Agricultural Statistics Service this past Friday. This once a year report usually grabs headlines due to its estimates of acreage of crops such as corn, wheat, cotton, and soybeans. It is often one of the most volatile trading days for those commodities as markets absorb the newest information and traders adjust their forecasts for future production.

While row crops grab most of the headlines, this report also sheds light on hay production for the past year and provides estimates for the upcoming year. Most hay producers in the Southeast are firmly in the middle of another hay season and this report provides estimates on what hay producers in each state and around the country are doing this summer.

Acreage of hay production in the Southeastern U.S. is expected to grow by 6.5 percent in 2018 as compared to 2017. This would be a 755,000 acre increase. This would be the first increase in hay acreage for the region since 2013 and only the second since 2008.

Missouri accounts for the majority of the increase in the Southeast region with 530,000 acres more hay than during 2017. This would be a 17.7 percent increase. Tennesse is next with a 103,000 acre increase and Kentucky is third with a 90,000 acre projected increase. Mississippi is expected to have slightly lower hay acreage – down 20,000 acres or about 3 percent.

For the U.S. as a whole, hay acreage was steady from 2016 to 2017 but USDA is projecting a 1.3 million acre increase in hay acres in 2018. This would be a 2.4 percent increase. Missouri is forecasted to see the largest increase in the U.S.

So what is driving these trends? Anytime hay acres increase or decrease, that land is instead used for something else. This is usually driven by the economic concept of opportunity cost which refers to the value of the next best alternative use. I mentioned that 2018 would be just the second year of increased acres since 2008. The two year period of 2007 and 2008 was the beginning of a record high grain prices that led farmers to pull as much land as possible into row crop production. In the following years, the opportunity cost of hay acreage that could instead be planted in corn or soybeans was really high.

However, corn and soybean prices haven’t touched those record-high levels in the last few years. In fact, the margins in most row-crop production have been very slim for most commodities. That has farmers considering the opportunity cost of land again. The projected boost in hay acres in the Southeast suggests that some producers – especially in Missouri – are placing a higher value on hay production than their next best alternative.

Largest June Cattle on Feed Total on Record

The latest cattle on feed report was released on Friday and it showed another year-over-year increase in the total number of cattle on feed. The reported estimated 11.6 million head of cattle on feed on June 1st. This was the 18th consecutive month that we’ve seen a cattle on feed number larger than the same month of the previous year. It was also another “largest-ever” statistic in that the report showed the largest number of cattle on feed for any June on record. There were 4.1 percent more cattle on feed this June 1st than last year. Four percent works out to a 457,000 head increase.

Placements came in basically flat when compared to May of last year. However, the number was higher than pre-report expectations that were anticipating about a four percent decrease in the number of placements as compared to last year. The basically flat number was within the range of expectations but it was at the upper end of that range. This was likely a contributing factor in the weakness in the cattle futures markets seen during Monday trading.

The placements number has been tricky to predict in this time of growing cattle supplies. Estimating placements relies on assumptions about how many cattle are out there to be placed and the factors that might cause cattle to be placed in one month or the next such as price and grazing conditions. Grazing conditions have impacted placement timing this year and seemingly continue to do so as we saw a nearly 10 percent increase in placement of cattle weighing less than 700 pounds over last year.

The marketing rate was very well anticipated pre-report and came in at 5.4 percent above May of 2017 levels. In total, the number of cattle marketed during the month of May was 105,000 head larger than it was during May 2017. The marketing rate continues to be a bright spot for the industry as it is helping to keep feedlots current and avoid a backlog of cattle in the feeding sector.  As shown in the figure below, the daily average number of marketings continues to outpace year-ago levels and the five-year average.

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.

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.