January 15, 2014
A V-shaped recovery for America's cattle sector?
Record prices, falling feed costs could put US beef production on a recovery as steep as its multi-year decline.
by Eric J. BROOKS
An eFeedLink Hot Topic
America's cattle sector is having a mixed, yet highly satisfactory year.
Bad short term news…
Of course, one might not judge that from some of the short-term statistical indicators. The USDA expects beef and veal production to fall a very steep 5.9%. This is the fourth year in a row and the fifth time in six years that US beef production has fallen. This is 11% lower than its all-time high of 12.43 million tonnes achieved back in 2002 -and 9.8% below the 12.2 million tonne secular peak achieved thirty-eight years ago, backin 1976 and again in 2008.
Until recently, this reflected a steep, secular decline in America's per capita beef consumption, from 40kg in the late 1970s to 24.1kg today. But that is not the case in 2014, the USDA expects consumption to rise about 1.4% with a 0.6% or 0.13kg increase in per capita consumption being augmented to population growth of 0.8%.
With demand rising and output falling, the difference is being made up in America's beef trade balance. Whereas export volumes exceeded those of imports by 35.6% in 2011, they will only do so by 1.5% in 2014.
After rising at steep double digit rates in the late 2000s, 2014 exports are falling 7.8%, from 1.1141 million tonnes in 2013 to 1.052 million tonnes this year. This is the second time they have fallen in three years and volumes stand 18.7% below their 2011 all-time high. But there is more to the poor performance than an undersupply of US cattle. With Brazil's real having declined 16% against the US dollar over the past year and the Canadian dollar by 5%, American beef got pricier overseas just as it got scarcer.
The higher US dollar and low domestic cattle supply also encourages imports, though scope for additional foreign beef entering is also limited. Although America's shortage of ground beef is jacking up prices, Australia increasingly finds it more cost effective to export to China. Second, the high cost of beef in US supermarkets is limiting demand for it.
Hence, after rising nearly 10% in the two years since their secular bottom in 2011, beef imports will only increase 0.29% this year, from 2013's 1.015 million tonnes to approximately 1.029 million tonnes this year. The relatively sparse increase in import volumes represents how the additional consumer demand created by America's accelerating economic recovery is being held back by record high prices for beef.
But while record beef prices are hell for consumers, they are a godsend for the US cattle sector. The first three years of this decade saw drought and high feed prices mercilessly squeeze the country's cattle inventories. From 102.9 million head in 1994, higher carcass yields and falling per capita consumption brought their number down to 95.0 million head in 2004. They were still at 94.5 million head in 2008 before a turn of the decade, multi-year dry spell devastated pasture land in the southern Great Plains and with it, US beef and cattle production.
Such that after 2012's historic drought and record high feed costs, closing cattle numbers bottomed out at a nearly unthinkable 88.3 million in 2013. But that is where the bad news ends and the good news starts.
... outweighed by good long-term news
Officially, the USDA is projecting the number of beef cattle to rise a nominal 0.3%, from 88.3 million head to 88.6 million, but there is good reason to believe that this forecast will be exceeded.
First, an eighteen month, 35% drop in feed costs has been joined by record high US beef and live cattle prices. Late December and early January saw US fed cattle repeatedly setting, breaking, and re-setting new cattle price records. First touching US$133/hundredweight, later followed by US$134/hundredweight.
With demand high, cattle in short supply and opportunities to either export steak or substitute for US ground beef imports abounding, January's record cold spell created even more supply concerns, making fed cattle futures touch US$139.54 in the New Year's first full trading week. -But even that could be a future blessing in disguise -so long as the exceptionally cold weather dissipates, it left in its wake unusually high volume of snow fall, which could prove key in recharging the southern Midwestern plains' parched pastureland.
Moreover, the market was strong across the entire beef and cattle spectrum, with select and choice cuts setting new price records. With beef and cattle prices rising strongly and costs falling by a correspondingly wide sum, it has been a long time since it has been this profitable to raise US cattle. Whether ground beef to be substituted in place of imports from Australia or pricier cuts destined for export to Asia, margins are entering the black, and encouraging an accelerated pace of inventory restocking, though from a historically low level.
As the accompanying chart shows, when the average cost of beef per pound is divided by the sum of the cost of feed corn and soymeal per pound, we see that the last quarter of 2013 saw a marked turnaround in beef and cattle's profitability, with January's record cattle prices accelerating the momentum of profitability into this year.
Since 2003, except for a brief three month window in early 2010, the last time returns on US beef were as profitable as they were in late 2013 and the start of 2014 were mid 2004 and late 2006, before feed costs took off. -But even so, that era was pockmarked by the discovery of mad cow disease in US cattle, which sent its exports into a nosedive that took nearly a decade to recover from. So, in effect, if the spread between cattle prices and feed costs can be maintained, it would be the biggest window of profitability that US beef cattle have enjoyed for the better part of two decades.
Of course, it takes a sudden increase in returns several quarters to boost inventories, and even longer in the case of beef, as cattle are the slowest growing of all protein lines. Nevertheless, a serious intention to retain cattle rebuild herds can be seen in slaughter rates and statistics on heifers. For the first half of 2013, they ran 2% ahead of 2012's pace. At that time, feed prices and poor pasture conditions made it practical to take advantage of high live cattle prices, thereby accelerating the pace of releases to market.
But when feed costs fell, it caused H2 2013 cattle slaughter rates to slump to 14% below the previous year's level. Even though inventories are stabilizing, 2014 will see cattle slaughter numbers to fall another 4%, as farmers retain more animals to rebuild their herds.
The urge to boost cattle numbers can also been seen in heifers, as a percentage of feeder cattle.They fell from the 42% to 45% range in the first half of 2013 to the 38% to 48% in the early fourth quarter and appear to be falling to nearly 36% in the first quarter of 2014.
All this portends the following: Cattle mature too slowly for early 2014's sudden improvement in profitability to impact America's beef output, exports or imports this year. Production and exports will not be significantly impacted by today's changes until later in the year. Moreover, until inventories recover, US beef import volumes are as much in the hands of domestic macroeconomic conditions as they are the country's cattle producers.
A lot can still go wrong. If the early year's cold spell persists, the benefits of pasture-rejuvenating snow that accompanies it may be counteracted by the fact that chilly cattle put on less weight and are more susceptible to disease outbreaks.
But with domestic and international beef prices set to stay high for several years and feed costs looking to stay low through the middle of this decade, provided pastureland weather conditions cooperate the stage is being set for a much faster recovery in US beef cattle production than has been commonly anticipated. A strong jump in cattle numbers would first manifest in substitution for ground beef imports, and provided the US dollar falls marginally in value, could lead to a rebound in exports by the middle of this decade.
Assuming. America's domestic economy continues to recover and cattle rearing returns remain high, the rebound in cattle inventories and beef output could be as comparably steep as was the decline of the past few years.
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