HIGHER, HIGHER: Prices, profitability break records in beef market
November 6, 2014
The sound of bawling calves and the smiles on bankers' faces tell us it's fall.
Lately when the auctioneer taps the gavel, the price for beef with the hide on is higher per pound than it was in the grocery store a year ago.
With 4-500-pound steers bringing more than $1,500, the two questions on folks' minds are "How high will the prices go?" and "How long can they last?"
Don Close, vice-president for food and agribusiness research for animal protein with Rabo AgriFinance says don't expect prices to level off anytime soon.
"I keep thinking that we need to at least slow down and have a correction at some point, but as we look at beef going into first and second quarters of next year, I think we're looking at still higher cattle pries and higher beef prices to consumers," said Close, who has been in the market analyst business for nearly 36 years.
John Nalivka, an ag economist who owns Sterling Marketing, Inc., said prices should stay high while producers are rebuilding their cow herds. The U.S. Department of Agriculture reports that year-to-date heifer slaughter is down 8 percent over 2013, while beef cow slaughter is down 17 percent and dairy cow slaughter is down 11 percent. "That's pretty clear evidence that we're at the end of liquidation and the leading edge of building herds," Nalivka said. "If that continues next year, the cattle supply will remain tight because you've taken those heifers out of the slaughter mix."
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For the last several years the cow slaughter rate has exceeded the heifer retention rate, and now that's finally getting evened out, he said. But it will still be two years before those heifers are contributing to the beef supply. "Unless something happens—never say never, there's always something around the corner—given all the current circumstances, we should begin to see a larger cow herd going into 2016."
To compensate for having fewer cattle to slaughter, feeders have been increasing the weight at which they market the cattle. The average slaughter weight is nearly 30 pounds heavier, at 899 pounds, than it was last year, Nalivka said. When feeders stopped using beta-adrenergic agonists, like Zilmax, last year, they thought the cattle would lose that 25-30-pounds the additive contributed. But the cattle that are headed to slaughter are heavier, because the price of corn is still low enough to make that gain worth the extra time and expense.
While corn is relatively inexpensive, adding pounds is efficient only to a point, he said. "As the cattle get heavier the conversion gets worse, so it costs more to put the pounds on. The cost of gain right now in the mid-70 to 80 cents and the market is twice that. If your break-even point is high that's not nearly as critical now, because the market is in good shape."
Close said feeder cattle from Canada and Mexico have helped with the supply. "The revised COOL ruling that took place about a year ago was certainly a game-changer that forced more cattle over as feeder cattle instead of fed cattle."
While the market price is similar in Canada and Mexico, the strong U.S. dollar and exchange rate makes cross-border purchases a better deal for cattle feeders. Though the rate has seasonal highs and lows, this year the U.S. has imported an average of about 10,000 head of feeder cattle a week from Canada, and about 20,000 a week from Mexico. Close said he doesn't think Canada can keep up that rate for another year, which will help keep cattle prices in the U.S. high. He anticipates Mexican imports staying stable to slightly lower in the coming year.
Nalivka pointed out that not only are cattle bringing high prices, the cost of fuel has dropped significantly and hay prices and interest rates are low, so the cattle industry is more profitable than it has been. "We should be seeing record profitability, not jut record prices."
While profitability may be prompting producers to expand, they may be running up against some limiting factors that weren't as limiting five years ago. The loss of pasture land to farmland, development and the reduction of AUMs on federal land has cut back on the space available to produce cattle traditionally. Large fires in the West have further reduced the grazing land, and sometimes producers can't find an alternative to hold their cattle over until the grass grows back. In some areas the cost to rent pasture is too high to make the budget work, even with today's high prices, Nalivka said. He is further concerned about increased government regulation, which he calls one of the biggest threats to the cattle industry.
The future of the beef industry may involve some adaptability, Close said. "If the profitability for production is there, producers will find a way to produce. Will it be a different production model than a cow-calf ranch in western South Dakota? It may well be. But technology and economics will find a way."
The drop in cattle numbers over the last several years, largely attributed to widespread drought that has finally ended in most of the West and Southwest, but lingers in California and the Pacific Northwest, coincided with lower levels of pork and chicken production.
The PED virus that affected pork production, and lower numbers of broiler chickens following the recession in 2008 affected prices throughout the meat case. "Prices for all animal proteins have been remarkably strong," Close said. "The demand from Asia and specifically China has been a huge driver of prices globally."
Because of the much shorter production cycle for chickens, which produce a generation of broilers every eight to 10 weeks, and hogs, which produce just over two litters a year, those numbers build much faster than beef.
Close said pork production levels depend on the severity of the PED virus this year, but between vaccines, increased immunity and improved management practices, he anticipates it will have less of an affect on the supply, and the prices, than it did last winter.
Faster expansion also means those markets are likely to reach the consumer acceptance threshold—the price consumers are willing to pay for a product—sooner. "The broilers are most susceptible to running into consumer resistance. Hogs are second and cattle are a distant third," Close said. "In the beef market we're seeing signs of stress at the willingness to buy. But we've never hit the point where the consumer says, 'stop.'"
The price consumers are willing to pay ranges from one type of meat to another. "I think there are some taste issues there. I think even with a low price, consumers will say they've had enough chicken. Pork offers more versatility, with chops and loins, bacon, sausage and ham, and beef has such wide range of products."
The rate at which prices go up can also trigger consumer resistance, Close said. "Prices can alter on birds or hogs relatively fast and consumers respond to that. The price changes on beef happen slow enough that consumers can adjust to the prices as they're moving."