Cattlemen warned of pending market shifts this year

Wednesday, February 20, 2019

High cattle numbers, trade policies forebode change, economist warns

A warning about excessive high supplies and uncertainty about international trade — both positive and negative — characterized economist Scott Brown’s forecast for the beef industry during his presentation to the 50th annual Beef Cattlemen’s Conference in Monett last week.

Brown

Brown, an agricultural and applied economics professor with the University of Missouri, said statistics show cattlemen have continued to increase the supply of beef, despite market dips. The January government shutdown delayed the January herd count by the U.S. Department of Agriculture, so the exact number and the risk that represents won’t come out until probably the end of February. Since the number of cattle has continued higher since 2014, Brown voiced concern over the impact of that on prices.

Historically, if supplies have increased by more than 1 percent a year, a greater quantity has become a drag on prices. In the past six years, supplies have grown by 10 percent. That made 2017 an especially rare year, when both supplies and prices rose. Brown anticipated herd supplies would level off this year. Slaughter inventories were at a three-year high.

Demand in the market has shifted with time. The market shifted from demanding leaner cuts of meat to now wanting more flavor. Prime value continues to rise, while prices for select beef have dropped.

“The bar to get premium keeps getting higher,” Brown said. “Good value has helped us. Restaurants will pay more for top quality.”

Brown noted demand for grain has grown faster than supply. Early indications suggest that corn production will continue to rise in 2019.

“Short of a catastrophic weather event, feed prices are going to stay low,” he said. “If there’s a severe drought, corn prices will go up. I think the technology in corn is better than it was in [the drought of] 2012. Even in a repeat of that, the corn yield would be better today.”

Weather conditions in January showed the worse drought at present in the Southwest, from Colorado to Oregon and California, a very small area, especially for cattle production.

Brown added a lockstep move of feed prices and corn supply concerned him, but no alternative appears available now. Hay prices remain high, and hay stocks remain tighter than in the past, especially in southwest Missouri though not in other parts of the state. If anything, Brown thought hay supplies may ultimately keep down cow counts.

He observed the nation has seen “one of the longest periods of declining unemployment rates” on record, which has continued to support supplies, but cautioned the probability increases that the unemployment trend could turn.

International trade volume has not kept up with expanding herd production from 2015 through 2018. Brown anticipated production would decrease into 2021, as would the volume of international trade. Looking at the rate of growth in herds, Brown concluded the economist’s notion of a “typical cycle” for the beef industry had disappeared. Even if supplies dropped, they could rebound faster than seen in earlier multi-year cycles.

Brown cautioned he feels more “bearish” about the market moving into the summer. The year has started with lower prices for calves and suspected feeder cattle prices may fall. He encouraged cattlemen to rethink sending so many cattle to feeder lots to grow them to their final weight, suggesting that with those lower prices and the volume of cattle in feeder lots in 2018, cattlemen may do better to bring cattle to finishing weight at their own farms.

“Feed yards are in a much different bargaining position than they were a few years ago,” he said.

Movement in international trade can directly impact the domestic market. Looming in that arena is the threat of African Swine Fever to the pork market in China. While the U.S. market has 6 million sows, China has 40 million. Brown said a 20 to 30 percent cut in the production of Chinese hogs could open doors for U.S. cattle supplies.

International trade policies can quickly impact prices, Brown warned. A withdrawal from the North American Free Trade Agreement (NAFTA) without Congress passing the United States-Mexico-Canada Agreement (USMCA), for example, could result in increased tariffs on U.S. Beef going to Mexico.

“We want the Mexican market available to us,” Brown declared.

Pulling out of the Trans-Pacific Partnership (TTP) put the U.S. in position to have to negotiate new trade deals with all the participating countries. Progress has been made negotiating with Japan, and Brown was hopeful an agreement there could help greatly. “Japan has been a stellar market for us,” he said. With no agreement, U.S. beef imports will face a 38 percent compared to 8 percent for Australian beef with the end of tariff reductions under TTP in 2033, an imbalance that will hurt sales.

From the first three quarters of 2018, growth in demand appears to have come as much from outside the U.S. as inside. Brown anticipated demand could become volatile and unpredictable. Without the international market, selling increased supplies relies heavily on domestic demand, in a marketplace where chicken and pork supplies have been moving up steadily since 1996. Beef supplies, growing since 2015, are now at a 25-year high.

As for his forecast, Brown said he’s more worried about downside risk than upside potential.

From a show of hands, he determined “no one” attending had a risk management plan. Some had used a futures contract and said they would again. Brown noted the U.S. Department of Agriculture’s Local and Regional Food Aid Procurement (LRP) program will allow trying a futures contract on as few as one heifer. He suggested trying something that small in numbers just to test the option.

As for selling cattle to feed lots, Brown challenged cattlemen to determine what price level would make them want to have someone else bring their cattle to finished market weight. He suggested only selling half the number going to market and finishing the rest on the ranch for a profitability option.

Brown noted that in a graph of cattle prices over the last 25 years, returns for breaking even on investment have not varied greatly if one factors out the boom years of 2014 and 2015, especially for fed steers. He said cattlemen are not going to see beef prices like those two years again.

Questions from the audience included a query about the continuation of high land prices. Brown said with cattle prices supporting the market, buying land has become an alternative to buying stock.

On the issue of lab grown artificial meat, Brown reviewed how the Missouri General Assembly during its last session voted to have the first clear labeling differentiating lab meat from animal meat. Brown said the two products will not compete over price now, but may in the future.

“I think there is a place for [lab produced meat] in the market,” Brown said. “I don’t know how much that will be. We need to stay in lock-step with that product. We have to continue to [put a product] in front of people that they want. That’s a 10-years-down-the-road issue.”

Traves Merrick, vice president of the Missouri Cattlemen’s Association, praised securing more rigorous labeling on lab-produced meat as the major legislative achievement in 2018.

“On the whole issue of fake meat, we must protect the integrity of animal protein,” Merrick said. “Legislators supported us.”

Merrick also saw progress in reducing state property taxes.

In 2019, Merrick said the association will continue to focus on protection for farmers from animal abuse charges. He cited State Rep. Sonya Anderson, R-Springfield, and State Sen. Sandy Crawford, R-Lebanon, for helping to pass laws to protect farmers from undue expenses when animals are seized. He noted it was important to differentiate between emotional and actual issues relating to animal neglect.

Merrick reviewed the Leadership College developed by the association for young farmers selected to spend a year learning from experienced farmers.

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