A Few Thoughts by John Nalivka – A look at 2018 beef industry margins | TSLN.com

A Few Thoughts by John Nalivka – A look at 2018 beef industry margins

The holidays are approaching and the end of the New Year will soon be upon us. At this time last year, the 2017 beef outlook was looking rather bleak as markets had dropped sharply following Labor Day. This year, the situation is considerably better and consequently so is the outlook. I don’t think I would be wrong in saying one has a lot to do with the other.

While the discussion often centers on the price outlook, the real conversation is margins and the relationship between margins in the three sectors of the beef industry. I am definitely not lecturing, but profit or losses are more than just market prices and this is increasingly true in today’s industry. Who is making money and how much as well as who is losing money and how much together with forage conditions drive the cow-calf business.

Cow-calf returns against variable costs this year will average above $100 per head. My estimate is $136 per head compared to $177 per head last year. While both years look good against historical margins for that sector of the beef industry, 2016 saw a 40 percent drop in profitability coming off the record prices of 2015. Based on my outlook for a 3 percent decline in both steer calf and feeder cattle prices during 2018, cow calf margins would likely be down $40 – $50 per head from this year averaging around $90 per head against 4 percent higher costs of production. That last statement has more than enough assumptions and can easily create quite a bit of discussion and that’s good. That discussion might lead to better decisions about production and marketing.

Through the end of October, feedlots had accrued an estimated average margin of $271 per head and considerably better than 2016, a breakeven margin year plagued by high break-evens at closeout and an 18 percent drop in Choice steer prices from the prior year. Feeding margins will likely average about $220 per head for all of 2017. My projections for a 3 percent drop in feeder cattle prices together with relatively low corn prices and a 3 percent drop in the 5-area steer prices leaves feeding margins averaging just under $100 per head in 2018.

Packer margins during 2017 will average about $126 per head against harvest and fab costs. I recently discussed how changes in the industry have bolstered packer margins. These changes will continue to support margins beyond 2017. Consequently, I am projecting packer margins will average $100 per head in 2018 against a 3 percent drop in the Cutout.

So, while prices are expected to be weaker in the face of record total red meat and poultry supplies (the highest since 2007), beef industry production margins will remain relatively strong. The key factor is demand, both U.S. and export.