New year brings uncertainty to beef marketplace

Donald Stotts OSU communications
A mature cow drinks water from tank in pen. Cattle and beef markets could be volatile this year. Oklahoma State University

STILLWATER — Although analysts project cattle prices to be lower than 2016 for year-over-year averages, several factors are poised to have a significant effect on 2017 cattle and beef markets and may change current price expectations.

“Uncertainty and volatility from a variety of sources will continue to hover ominously over cattle and beef markets in 2017, though most analysts currently project cattle prices in 2017 to average close to fourth quarter 2016 levels,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

Current U.S. macroeconomic conditions are encouraging; the stock market finished strong and unemployment was low at the end of 2016. However, the nation’s economy is gearing up for higher interest rates and potentially higher inflation in 2017.

“Uncertainty about possible changes by the incoming Trump administration is negatively affecting markets now but the actual economic effects of any changes may be positive, negative or, more likely, some combination of both,” Peel said.

In addition to U.S. macroeconomic uncertainty, global market uncertainty will likely continue in the coming year as well. The Brexit vote last summer has been followed by several additional populist political moves in Europe that have added to global economic anxiety.

“Separate but related to macroeconomic uncertainty, volatility in Live and Feeder cattle futures has significantly reduced the effectiveness of these tools for price discovery and risk management, and contributed to additional cash market volatility, which appears likely to continue in 2017,” Peel said.

Beef production

An additional 4 percent of beef production is expected in 2017 in addition to the 6.1 percent year-over-year increase in 2016. Cattle slaughter exceeded expectations throughout 2016.

“Feedlots have continued to move cattle aggressively for some months now, especially since September,” said Trent Milacek, OSU Cooperative Extension agricultural economist for the state’s Northwest District.

In the three months before December, feedlot marketings exceeded placements by 13.1 percent, resulting in a net feedlot outflow of 685,000 head and leading to the smaller year-over-year feedlot inventories at the end of 2016.

“This helped contribute to greater-than-expected cattle slaughter and beef production numbers in the last half of 2016,” Milacek said. “Furthermore, it suggests feedlot operators have pulled cattle ahead, setting up relatively tighter first quarter 2017 feedlot supplies, particularly if winter weather should impact feedlot production in any significant way.”

However, Milacek pointed out that does not change the fact feeder supplies will be larger in 2017 and more cattle must move through feedlots in the months ahead. Herd expansion through 2016 ensures increased beef production through 2018.

“The cattle and beef market supply challenges will continue highlighting the need for strong domestic and international beef demand to moderate larger beef production in 2017,” he said.

International beef trade

Peel agrees with Milacek that international trade in beef and cattle will be a critical component of price expectations for 2017. Expectations for continued growth in beef exports – simultaneous with decreased beef imports – will significantly offset a portion of increased beef production in 2017.

“One of the bigger uncertainties surrounding the Trump administration is the direct impact on current trade patterns as well as potential future beef and cattle trade policies,” Peel said. “The dollar is expected to continue strong and will continue to pose a headwind to faster and stronger improvement in cattle and beef trade.”

Milacek added the strength of the U.S. dollar has made practically every American-produced commodity more expensive on the world market.

“The price of grains in the United States has had to adjust downward to compensate, which has been of great benefit to cattle feeders,” he said. “We continue to see strong basis figures for grain sold near feedlots, which encourages domestic use. This not only helps reduce the large grain supplies but also allows for lower cost of gain in the feedlot.”

Beef Demand and Total Meat Supplies

Most industry analysts expect increased beef production to combine with increased pork and poultry production for another record total meat supply in 2017.

“Domestic per capita meat consumption is not expected to be a record, depending critically on continued exports of all meats, but it is expected to increase another 1.5 percent year over year in 2017, on top of the 1.4 percent year-over-year increase in 2016,” Peel said.

Retail beef prices are projected to continue adjusting downward in 2017, which is critical to help the market absorb additional beef in the face of large total meat supplies. Retailers and packers have secured a larger share of the retail dollar since the break in cattle prices in 2015.

“The Choice steer value as a percent of the retail beef value peaked in late 2014 at approximately 60 percent,” Milacek said. “Since that time, the producer’s share of the retail dollar has fallen to 42 percent. As competition from other meats begins to weigh on beef prices, expect to see the live-to-retail beef price spread narrow once again.”

The average spread from 2010 to 2014 was $1,093 per 1,000 pounds in November. In 2016 the spread was $1,503 per 1,000 pounds.

“Cow-calf producers will have the difficult task of securing a profit in their herds as we move into 2017,” Milacek said. “Lower prices have encouraged producers to bring more cows and heifers to slaughter, which could very well slow expansion into 2017.”

Additionally, this has added to the beef supply in the near term. Heifer slaughter in November totaled 106,000 head more than the same time in 2015. Similarly, cow slaughter posted year-over-year increases as well. This could result in fewer breeding females entering the cow herd.

Feed and drought

Feedlots should continue to enjoy low cost of gain as record 2016 grain crops keep grain supplies plentiful through the current grain marketing year. Dry conditions across much of the southern part of the country are consistent with La Niña conditions and could be an issue for 2017 forage and crop production if current conditions persist into spring.

As of the December 27, 2016 Oklahoma Drought Monitor, 94.37 percent of the state was considered to be in a D0 to D4 drought. Of that total, 45.73 percent was at a D2 to D4 drought rating.

“This is having a detrimental effect on winter pastures that could negatively affect wheat pasture stocker gains,” Milacek said. “Another concern is the potential for continued drought to reduce the available forage at spring green-up. Ultimately, this could cause a reduction in stocking capacity of our summer pastures.”

According to the Livestock Marketing Information Center, continued dry weather has caused pasture conditions in the Southern Plains states to register 15 percent in poor to very poor condition. Comparatively, southeastern U.S. pasture conditions are now at 33.67 percent in the poor to very poor category.

“We may start to see more cattle moving north and west if pasture conditions continue to deteriorate in the Southeast,” Milacek said.

Late 2016 affecting early 2017

Boxed beef prices headed into the last half of December at the highest levels since early September, with the Choice boxed beef price having risen 6.7 percent from the late October low, registering only 2.3 percent below year-ago levels.

“This was quite impressive given that beef production continued stronger than expected in the fourth quarter,” Peel said. “As of mid-December, Choice boxed beef prices averaged 12.9 percent down from year-earlier levels while beef production increased 5.7 percent for 2016.”

Despite larger total meat supplies and a particularly strong jump in beef production, retail beef prices maintained strong ratios to pork and poultry but were adjusting downward slowly.

In November, The All Fresh beef-to-pork retail price ratio was 1.53, down from the peak of 1.65 in June 2015. This ratio averaged 1.33 in the five years from 2009 through 2013 and has averaged 1.5 since January 2014.

The All Fresh beef-to-broiler retail price ratio was 2.93 in November, down from the peak of 3.13 in May of 2015. The 2009 through 2013 average of this ratio was 2.4 but has averaged 2.98 since January 2014.

“Hog supply and pork production challenges relative to beef are not over going into 2017,” Peel said. “The December 1 inventory of all hogs was 103.7 percent of one year ago, breeding hogs were 101.5 percent of last year and market hogs were 104 percent of one year ago. All categories were above pre-report estimates and are likely to provoke a bearish market reaction.”

In addition, estimates of the September through November pig crop as well as the farrowing intentions through May of 2017 were all above expectations. This may push 2017 pork production estimates even higher and will add to the supply pressures in all meat markets in the coming months.

Middle meats comeback

“There are indications that retail beef demand has shifted somewhat back to the middle meats after several years of relatively stronger end meats,” Peel said. “End meats have carried a relatively higher percent of carcass value since the recession that began in 2008. Generally speaking, mixed strength in steak demand was countered by weak processing beef markets and lower end meat values in 2016.”

As of mid-December, rib primal values were nearly 3 percent higher than the same time last year, mirroring higher Ribeye wholesale values. However, loin primal value came in approximately 12 percent lower year over year with Strip Loin and Short Loin values down double digit percentages and Tenderloin values about equal to one year before.

“The lower loin cut values represented a continuation of an apparent downward trend in relative loin values in the past decade,” Peel said. “The bottom line is domestic beef demand in 2017 will depend on macroeconomic factors such as income growth and unemployment as well as the impact of larger total meat supplies, with potentially significant effects coming from beef export and import flows as well.”

Oklahoma nationally ranks fifth in cattle production, eighth in hog production and 10th in poultry production, according to National Agricultural Statistics Service data.