A few thoughts by John Nalivka: Winter weather and the market
January 11, 2017
If you are feeding cows and / or calving already, this year's winter weather may already be getting old. However, there is some consolation; stronger markets and the outlook for a good water year. Readers may not all be affected by the water aspect like most of ranchers and farmers in the West, but stronger cattle markets are a welcome relief to everyone in the business.
Severe cold and snow in feedlots affects cattle performance which in turn impacts expected marketing of finished cattle. Feed goes toward maintenance rather than gain. So, while the marketing of finished cattle has been disrupted, the supply did not disappear.
Feedlots are current, supplies are relatively tight, and Choice steer prices are stronger. From that stronger steer price flows positive feedlot margins and so far, continued positive packer margins. While weather plays a large role, these prices are judged against sharply lower breakeven prices for cattle place on feed during much of 2016. While high feeder cattle prices are great for cow-calf and stockers, the resulting high breakeven prices lead to a market imbalance that is not sustainable.
So, let's step back a bit. First of all, cattle herds continued to grow during 2016 with the Sterling Marketing cattle inventory projection showing just over a 2 percent increase. Even though beef cow slaughter ended 2016 up 14 percent from a year ago, but at the same time, the industry entered 2016 with a record number of "replacement" heifers with the highest percentage of those expected to calve since 2010. Heifer slaughter was up 4 percent last year. If the beef cowherd is up 3 percent on January 1, 2017 (Sterling projection) from a year ago, then nearly 14 percent of those heifers at the beginning of last year actually were bred, calved and entered the cowherd, the highest since 1993. The bottom line is cattlemen are building herds at a relatively fast pace and heifers entering the cowherd offset the large increase in cow slaughter. On a year-over-year basis, beef cow slaughter posted a large increase against 2015's drop, but as a percentage of the beef cow herd, it was only on par with 2014. The 2016 calf crop will be 4 percent larger than a year earlier (Sterling).
So, while feedlot marketings have been disrupted, cattle numbers are building. If demand does not keep pace with these increasing supplies, the current "weather-related" price strength will be relatively short-lived and prices will again be pressured by supply as the weather improves. In addition, hog numbers and pork production will continue to increase and be a deterrent to stronger prices over the next 2 years.
In summary, the current situation has been welcome, but it is still winter, cow herds are building and business diligence is in order.