AGRICULTURE

Cattle market top ten List for 2014

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Farm Forum

As we turn the calendar to 2014, it feels as though the cattle industry is returning to an “old normal” set of conditions that existed before the drought and high corn prices of the last half dozen years. While a complete return to the past isn’t likely, it does appear that a “new old normal” could be in the works for the next year. With that in mind, here’s my annual Cattle Market Top 10 List for 2014. These aren’t necessarily in order of importance, but nevertheless in ‘countdown’ style. Best wishes for a prosperous New Year!

10. Lower Corn Prices.

In last year’s Top Ten List, I indicated that corn prices were set for either a big increase or decrease during 2013. Both happened. Prices in Omaha, NE posted a high of $7.67/bu in late January 2013 and a low of $4.10/bu in mid-November 2013. While some volatility is likely in the next year, corn prices aren’t apt to have a $3.57/bu yearly trading range in 2014. Currently, USDA is projecting 2013/14 domestic ending stocks at nearly 1.8 billion bushels, more than twice last year’s ending stocks. Additionally, USDA projects world corn production nearly 12% higher than a year ago and world ending stocks for 2013/14 to increase by 20% from last year. Much higher ending stocks for the current marketing year and prospects for a good growing season for the next crop (already growing in the southern hemisphere) will likely keep the national average cash corn price near $4/bu in 2014. Seasonal highs for the year could reach $5.00-5.50/bu and lows could be at or near $3.00/bu.

9. Country of Origin Labeling.

Although the debate and challenges associated with COOL are over a decade old, the USDA labeling program will be a focus of international trade issues, consumer information demands, and industry compliance costs in 2014. In May 2013, USDA revised its mandatory COOL regulation to comply with an earlier World Trade Organization (WTO) ruling that held that the mandatory COOL law created a less favorable treatment to imported animals than like-kind domestic animals due to record keeping and verification costs. The revised rules, which were upheld by a U.S. district court in September, require additional detail regarding where animals were born, raised, and slaughtered. Meat packers and some industry groups indicated this would create substantial costs, and one major packer has already stopped purchasing slaughter cattle from Canada. Several consumer groups and some industry groups support COOL. While the industry struggles to comply with the COOL regulations, the U.S. faces the possibility of trade sanctions related to a variety of goods imposed by Canada and Mexico.

8. Drought Becomes More Regionalized.

Nearly three-fourths of the country experienced drought conditions in 2012 and the first half of 2013. At the end of 2013, about 54% of the U.S. was categorized as having abnormally dry to exceptional drought. Regionally, many areas of the country saw marked improvements by the end of 2013. The High Plains states dropped from 98% drought conditions to 54% during 2013. Similarly, the Southern states dropped from 81% to 43% and the Midwest states declined from 72% to 33%. Improvements in drought conditions will boost feedgrain and hay production in these key states in 2014. Western states, though, still have 77% of lands rated in drought conditions (up from 75% a year ago). These states are home to roughly 10% of the U.S. cow herd. Across the country, about 48% of the national beef cow herd was in states with at least 40% of its pasture and range condition rated good to excellent at the end of October, up from 21% a year earlier.

7. Hay Production/Prices.

Hay stocks are forecasted to rebound significantly from last year due to increased yields and a slight increase in harvested acres in 2013. May 1, 2014 stocks of all hay are expected to be nearly 26 million tons, up from 14.2 million tons on May 1, 2013. Harvested acreage is forecasted to increase around 2% in 2014 as lower corn and soybean prices lower competition for land. As a result, season average all hay prices are expected to drop to around $125/ton this next year.

6. Consumers Eat Less Beef.

The continual declines in cattle numbers have resulted in less beef production in recent years. While commercial beef production only declined about 1.1% in 2013 to an estimated 25.6 billion pounds, much larger declines are forecasted for 2014. In 2014, a sharp decline in cattle slaughter numbers and slightly higher carcass weights will likely result in commercial beef production falling 6-7%, to under 24 billion pounds. Domestic beef consumption equals production after adjusting for imports and exports. Although increased imports may fill some of the domestic production decline, it is almost certain consumers will eat less beef than they have in decades. Per capita consumption averaged about 56.4 pounds in 2013, nearly 2% lower than in 2012. However, consumption is likely to drop to 53-54 pounds per capita in 2014. The big demand question is whether consumers will continue to pay more for the smaller quantities of beef they buy. So far, they have, with retail beef prices continually setting new record highs in 2013. In fact, for the first three quarters of 2013, beef demand averaged about 3% higher than the comparable time in 2012.

5. An Unknown Event.

One or more things that can’t be forecasted, or maybe even imagined, will likely affect the cattle industry in some way. Think along the lines of BSE in 2003, or the tsunami/earthquake in Japan in 2011, or lean finely-textured beef in 2012. There is no way we can knowledgeably predict if or when such market-moving events could occur. However, they do seem to emerge periodically, underscoring the need and importance of a sound risk management plan to protect against sudden drops in price.

4. Record High Feeder Cattle Prices.

An estimate of the 2013 calf crop won’t be available until late January; however, it appears that last year’s calf crop was around 2% smaller than in 2012. That would put the available supply of calves around 33-34 million head, making it the smallest calf crop in at least 53 years. With ample feedyard capacity and a drop in the feeding cost of gain from around $120/cwt to $80/cwt, good demand exists for feeder cattle. Steer calf prices (500-599 lb) basis South Dakota, are expected to average in the mid-$190s for the year. The annual average yearling steer price (700-799 lb) in South Dakota will likely be in the mid-$170s.

3. Herd Rebuilding.

An increase in the size of the beef cow herd is expected in 2014, as early evidence points to significant interest in herd expansion late in 2013. However, don’t look for a sizeable increase in the annual Cattle Inventory report that USDA releases at the end of January. Beef cow numbers have not likely grown appreciably due to high beef cow slaughter during the first half of 2013. Further, many of the heifers that were being retained for breeding at the beginning of 2013 were culled and fed for slaughter due to continuing high feed costs early in the year. It really wasn’t until the fourth quarter of 2013 that beef cow slaughter sharply declined and heifer retention interests increased. This will likely result in growth in the national beef cow herd later in 2014. While economic signals point towards a relatively quick growth rate in this expansion phase of the cattle cycle, the large capital investment needed to purchase/retain breeding stock will likely keep many cow-calf operators wary about overextending themselves.

2. Record High Slaughter Cattle Prices.

Fed cattle prices averaged almost $126/cwt in 2013 (5-area market average). While that wasn’t high enough for positive closeouts during most of the year, it was about $3/cwt higher than in 2012. With a forecasted drop in commercial cattle slaughter of around 7% in 2014, slaughter cattle prices will likely average around 6% higher for the year. That would put the yearly average above $130/cwt for the first time ever. Fed cattle prices are expected to average in the low-$130s in the first and third quarters of 2014 and the mid-$130s in the second and fourth quarters of the year.

1. Profits.

Record high prices for nearly all classes of cattle, combined with cheaper feed costs, offer profit potential for cow-calf production, backgrounding/stocker operations, and finishing in 2014. National average cow-calf returns (over cash costs, including pasture rent) could approach $300/head in 2014, up from about $140/head in 2013. Of course, a return to dry conditions and higher feed costs could lower those projections (as it did in 2013), but at this point, it appears cow-calf production could have one of its most profitable years ever. Current winter calf backgrounding programs suggest profits around $50/head are possible for yearlings coming out of these programs early in 2014. The cattle feeding margin projected by the futures market (i.e., the spread between live cattle, feeder cattle, and corn prices) suggests that gross feeding margins of $150/head are possible in the early months of 2014, with gross margins declining to around $65/head by early spring. The gross margin for the remainder of 2014, though, is negative as high feeder cattle prices erase profit projections for closeouts later in the year.

Reprinted with permission of The Cattle Business Weekly Newspaper.