Cattle producers cautioned about weaker 2017 market

Wednesday, February 8, 2017

Speaker warns of record herd sizes, uncertain international trade

After two years of record prices, local cattlemen heard little to bolster their spirits from agriculture economist Scott Brown at the Monett Beef Cattlemen’s Conference, who reported the just released nationwide herd inventory from the U.S. Department of Agriculture showed bigger herds than even expected.

Brown reported the number of beef cows in the nation had increased by 1 million head over a year ago, up 3.5 percent, or 1.5 percent, more than the pre-report estimated. The total number of cows totaled a rise of 1.8 percent, compared to a pre-report estimate of 0.8 percent. The number of cattle placed on feed in December was up 17.6 percent, when observers had expected a boost of 8.8 percent.

Brown asked for a show of hands as to which producers still had heifers. Almost everyone in the room raised their hands. When prices fell from records highs last fall, many producers opted to not sell and had additional unbred cows standing by to boost herd size. The latest count showed national heifer numbers up by 1.2 percent. Brown said that meant herd sizes would likely increase, possibly into 2018.

“The cure for low prices is…low prices,” Brown said, quoting an old adage in the beef industry. “Prices are not low today. When profitability moves lower, we are not very responsive. Supply sides have become used to low profitability. We’ve been growing global profitability. We thought the price would stay up. There’s reasons to be optimistic. That’s not to say we’re going to have record prices henceforth.”

Brown said he believes the industry will look back on 2012 to 2015 as the second golden age of agriculture. The challenge now is to figure out how to respond to changing market conditions in 2017. Record prices developed because the drought beginning in 2011 significantly reduced herd numbers, leading to the lowest cattle inventory in January 2013 since 1952. With the collapse of the ethanol industry and record supplies of corn available at low prices, profitability for producers hit new heights until 2016.

The January count should total herds exceeded 31 million head, with increases in almost every state — up 170,000 head in Texas, 172,000 head in Oklahoma and 150,000 head in Missouri. Brown said these numbers suggest the total national herd could rise another 500,000 head in the next year.

On top of that, poultry and pork production is also on the upswing. Brown could foresee a 10 billion pound increase in meat on the market, placing meat levels at a high not seen since the early 1990s.

The industry managed through the previous peak by growing international trade. In the current political climate, that picture is much less clear.

If the U.S. had signed onto the Trans Pacific Trade Agreement (TTP), for example, Brown said the tariff on U.S. beef in Japan would have dropped from 35 to 40 percent to 9 percent, creating what he called a long-term benefit for the beef market. The North American Free Trade Agreement (NAFTA), on the other hand, affects trade with Mexico, a big customer and one that becomes more important if the U.S. loses access to Asian markets.

“I’m more wary about NAFTA than TTP,” Brown said. “NAFTA is today. TTP is 10 years down the road.”

Brown did not rule out the possibility of the Trump Administration successfully negotiating better term for U.S. food exports. He observed a decrease in international trade in the meantime left the only alternative as growing domestic demand. He saw some reason for optimism there, especially in choice beef, where demand has not diminished.

In the meantime, he urged cattlemen to adopt strategies to limit their risk. He warned producers that if they decide to keep calves and feed them, rather than sell them at prices they don’t like, they face a whole different set of risks. He observed feeder calves at present are commanding 90 to 95 percent of wholesale beef prices, a figure that is not sustainable over time.

As a general strategy, Brown said smaller producers can survive if their cost per cow falls in the lower end of the $600 to $1,000 per animal range. He warned of expense creep, noting that producers cannot reduce their risk if they do not know exactly what their true expenses are. He also urged producers to take another look at the futures market and locking in a price they can accept.

“Don’t look backwards as you decide for your operation,” Brown said. “There will be opportunities.”

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