Beef is bouncing back

by Ron Sterk
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The U.S. cattle inventory on Jan. 1 was up 2,845,000 head, or 3.2%, from a year ago, the largest year-over-year increase since 1981 and the largest percentage increase since 1975, when the herd peaked at an all-time high of 132 million head, U.S. Department of Agriculture data show.

In its annual Cattle report issued Jan 29, the U.S.D.A. pegged total inventory of cattle and calves at 91,988,000 head, the second consecutive year of increase after a recent bottom of 88.5 million head in 2014, which was the lowest inventory since 1952. The Jan. 1, 2015, inventory was revised down slightly to 89.1 million head, up less than 1% from 2014.

The increase suggests the U.S. cattle herd is solidly in the rebuilding phase of its multi-year cycle, which typically averages about 10 years and may be traced back to the mid-1800s, although it got “out of whack” for a time after 2006 as corn prices moved to higher levels due to increased demand from ethanol manufacturers and feed supplies shrank (and prices rose) due to adverse weather.

Cattle numbers rally 3%; beef prices easing as industry recovers from historic herd decline.

The cycle is the result of cattle prices and biology. Low cattle prices typically trigger a reduction in herds, which may occur quickly as producers may haul cattle to market in a day. High prices typically encourage producers to increase herds, which takes longer because of biology (number of months for a cow to have a calf, for a heifer to reach breeding age, for it to have a calf and for the calf to reach slaughter weight, etc.). Cattle and beef prices typically peak early in the rebuilding phase as heifers are held off the market for breeding, which further reduces slaughter cattle numbers and beef supplies for a time.

Cattle and beef prices reached record highs the past couple of years and likely peaked in 2015.

The U.S.D.A. said the number of beef replacement heifers (those kept for breeding and not sent to slaughter) was up 3% from Jan. 1, 2015. The number of steers weighing 500 lbs and over (coming to slaughter in the next 7 months or less) was up 4% from last year, indicating an increase in beef supplies during 2016. The number of calves under 500 lbs also was up 4%, suggesting rising beef supplies further out.

Aiding in the rebuilding phase of the cattle cycle has been declining feed prices, with corn futures only modestly above multi-year lows. Prices for corn paid to farmers averaged $3.70 a bu in 2014-15, down 17% from a year earlier, and are forecast to average around $3.60 a bu in 2015-16 (September-August), the U.S.D.A. said in its latest World Agricultural Supply and Demand Estimates report.

Further indication of active herd rebuilding came from the U.S.D.A.’s January Cattle on Feed report, which showed the total number of cattle in feedlots on Jan. 1 at 10.6 million head, down slightly from Jan. 1, 2015. The number of steers on feed was up 3% while the number of heifers was down 7% and the lowest per cent of the total since the U.S.D.A. began the data series in 1996. Those heifers most likely are going into cattle herds for breeding.

Cow slaughter (as opposed to slaughter cattle from feedlots) points to strong herd rebuilding.

Cow slaughter (as opposed to slaughter cattle from feedlots) also points to strong herd rebuilding.

“Beef cow slaughter has accounted for less than 50% of total annual commercial cow slaughter in only two years — 2014 and 2015 — since the early 1990s,” the U.S.D.A. said in its January Livestock, Dairy and Poultry Outlook. “Such a low level of beef cow slaughter could indicate potentially significant herd rebuilding. Estimated total annual commercial cow slaughter for 2015 is expected to be the lowest since 2005 — the last attempt at cow herd expansion — and about 13% below the average for the last 29 years.”

As the cattle herd grows and slaughter numbers increase, larger beef supplies and lower beef prices should follow. The U.S.D.A. forecast U.S. beef production at 24,605 million lbs in 2016, up 3.8% from 2015 and the first increase since 2010. Annual average slaughter cattle and feeder cattle prices are forecast lower for the second consecutive year after peaking in 2014. Currently, wholesale prices based on the U.S.D.A.’s cutout value for a 600- to 900-lb choice beef carcass are down about 17% from their peak in May 2015.

Lower cattle prices should not deter herd rebuilding, because feed prices are relatively low. And lower beef prices may encourage domestic consumption, which had stagnated when retail beef prices were record high the past couple of years.

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