Beef market stronger than expected for cattlemen in 2017

Wednesday, February 14, 2018

Economist optimistic, cautious in forecasting 2018

A better-than-expected market for cattlemen in 2017 left speculation open about what will happen in 2018, according to Scott Brown, agriculture and applied economics professor with the University of Missouri.


Speaking at the 49th annual Monett Beef Cattlemen’s Conference, Brown said many positive indicators suggest 2018 will be a lot like 2017, with only slightly lower prices for producers. Demand held stronger than expected in 2017, sustaining prices and encouraging the continued growth in herds, which generally drives prices down.

Brown said 2012 to 2014 may be viewed as the Golden Age of Agriculture for the 21st century, just as 1910 to 1914 gained that status for the 20th century.

As for what will happen next, Brown pointed to several trends. He noted average cow returns have remained relatively flat for three years. However, he expressed surprise that calves continued to sell at $3 a pound last year, when before the 2014 upswing, propelled by the devastating 2012 drought, calves were selling for as little as $2 a pound. The higher prices have continued to spur the growth of herds, which he believes will continue into January 2019.

Beef cow slaughter in 2017 accounted for 9 percent of inventory, not quite keeping up with the growth. Brown said slaughter rates will have to rise to 10.5 or 11 percent before the size of herds begins to fall. Herds have grown 3 percent a year over five continuous years, something rarely seen.

Because of the abundant supply, Brown expected beef prices in general to fall approximately $5 below 2017. Top grade beef continuous to draw better prices. He urged producers to concentrate on hitting that standard, usually through artificial insemination, and thus better profits. Typically only 6 percent of a herd may quality as prime grade, while Brown could point to a herd where 75 percent qualified as prime.

Market indicators show the public will pay for taste. Brown noted that chicken breast prices have remained flat for seven years, while bacon prices have risen by 40 percent. Per capita meat consumption since 2014 has nearly returned to the volume prior to the 2008 economic downturn. If demand can hold at 225 pounds of meat per person in a year, across chicken, pork and beef, market conditions for producers will remain positive, he said.

Supporting production is corn selling at $3.30 a bushel with an annual yield of 3.4 billion bushels. That supply, Brown noted, stands in sharp contrast to having less than 1 billion bushels in reserve in 2012, at the time of the drought, when corn was selling for $7 a bushel. That suggested better feed prices for cattle producers, and a better position to operate in case of another drought.

Brown was less optimistic about international trade of beef. The consequence of pulling out of the Trans-Pacific Partnership (TTP) trade agreement to date offered little opportunity to renegotiate and opened the door to competitors like Australia, who may be pleased to squeeze the U.S. out of the marketplace.

Under a World Trade Organization (WTO) agreement, imports of U.S. beef into Japan, for example, faced a 38 percent tariff. Without TTP, U.S. beef now faces a 50 percent tariff. Australian beef has a tariff of about 28 percent. Had TTP been ratified, both U.S. and Australian beef would have seen tariffs fall to an equal level of approximately 10 percent in 10 to 15 years. Tariffs were much higher 25 years ago before the WTO intervened.

Brown said he believes Australian beef cannot compete with the quality of U.S. beef, but at this point, only the high end customers can afford to buy the U.S. product under such tariffs. He placed his hopes on the U.S. government striking a bilateral deal with individual market countries in Asia, like Japan, to mitigate the present market position.

If beef consumption in China could rise by 10 pounds per person, Brown said the China market could become as profitable as Japan. However, the average income in China is lower than the U.S., and the Chinese economy showed signs of slowing. As people become more affluent, they turn their sights on consuming more protein.

Further reduction in trade by withdrawing from the North American Free Trade Agreement (NAFTA), combined with a drought, could impact the beef market very hard, Brown said. He declined to speculate on what President Trump might do, saying he would rather talk about it the day after Trump acted.

Brown urged producers to look for efficiencies to strengthen their operation. He noted large producers historically reduce costs per animal, but smaller producers can do the same. Brown observed local cattlemen likely have no idea what the average cost is to produce cattle. Finding a benchmark offered a way to look at one’s own operation.

The year ahead likely holds more downside risk, Brown warned, especially with weather indicators pointing toward growing drought conditions. He noted the February cattle report from the U.S. Department of Agriculture shows herd sizes about as expected, and the 2017 calf crop was down by 1.4 percent, a positive sign. Many variables left the forecast open as the year develops, he said.

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