A Few Thoughts by John Nalivka: Calf and feeder cattle prices for 2016 | TSLN.com

A Few Thoughts by John Nalivka: Calf and feeder cattle prices for 2016

The big question is how low do we go? Weaker cattle markets have definitely stirred some serious conversation over the past few weeks. Those producers who sold earlier in the year are probably pretty happy with the decision while those who turned down offers earlier or are just now getting ready to market cattle may not be quite so happy. But, I think it isn't so much that prices have necessarily taken a nose dive or even a sharp drop, it is that they have come off record levels and that tends to create greater concern – the higher you are, the further the fall. Right up front, I am not advocating this to be the case for next year's cattle markets.

Cattlemen are definitely building herds, but even more importantly, today's cow herd is younger and more efficient. This is in stark contrast to our production base prior to the drought –forced herd liquidation that took the inventory to its lowest gate count since 1951. Year-to-date, beef cow slaughter is down 17 percent from a year ago while heifer slaughter for the same period is down 12 percent. There is no doubt that herd building is going forward at a relatively fast pace.

Even though there are major differences in today's beef industry and this has changed much of the market structure, I do think it is good to go back and look at history for some comparative analysis. In general, steer calf prices (500-550 pounds) are down about 20 percent from their highs last fall. Those record high prices last fall were the result of six years of successively higher prices that began in 2009. In 2008, prices had fallen 28 percent from their 2006 highs. In 1996, calf prices dropped a precipitous 42 percent from their 1993 high!

Looking at feeder cattle prices, the market has fallen 18 percent from the record high last fall. This compares to a 24 percent drop in 2008 from the previous high in 2006. Since that low in 2008, yearling cattle prices reached a high last year that was over 2 and a half times higher than the low (not inflation adjusted).

Even though prices will weaken further into 2016 in response to increased beef production (+3 percent) as well as our forecast of pork production that will likely match or exceed this year's record, and 4 to 5 percent more chicken, I still don't expect a collapse comparable to previous cattle cycles. Calf prices are likely to drop 15 to 18 percent in 2016 while feeder cattle will be under greater pressure with feedlots increasingly motivated to erase very red ink! Consequently, an 18 to 20 percent drop in feeder cattle prices is more than likely.

Budget-wise for the cow-calf operator, Sterling Marketing forecasts are far from creating a wreck in 2016 (returns down $100 to $150 per head), but at the same time, managing costs, to the extent possible, will be increasingly important.