June 21, 2016
      
America's cattle market cycle turns, but longterm growth will endure
     
By ERIC J. BROOKS
    
An eFeedLink Hot Topic

 

America's cattle market cycle has turned but its momentum will carry bolster American beef's output and trade position for several years to come. With feeder cattle and live cattle repeatedly breaking price records and setting all-time highs above US$230/cwt and US$170/cwt respectively, the rally was a victim of opportunism. Because cattle inventories take years to build, farms took advantage of low feed costs and improved cattle genetics to fatten cattle to record weights. The extra steaks could not be absorbed by the hamburger-happy US market and a high dollar made them awkward to export, resulting in a steep Q3 2015 price crash.

 

At US$137/cwt, US feeder cattle and live cattle were selling 40% and 30% respectively below their historic price peaks a year earlier. At the same time, the news from recovering pastureland is not entirely good: According to the USDA, pastureland rents have risen 15% in leading beef producer Texas and by 6% to 12% in major southern producing states such as Alabama, Louisiana and Mississippi. On the other hand, in line with predictions that US beef production will migrate northwards, northern plain states such as Kansas, Nebraska and the Dakotas saw their pastureland rents rise by less than 0.5%.

 

Despite such medium term difficulties, American beef producers are not returning to the market conditions that made life difficult for them the last time cattle were at this price level. Compared to 2012-13 when cattle last traded around these prices, feed costs are 50% lower. This plays a large role in offsetting both the lower cattle prices and higher pastureland rents.

 

Better still, because pastureland in southern plains states like Texas and Nebraska and even coastal California are starting to recover from drought, grass can be increasingly substituted in place of more expensive feed. Hence, while the exceptional profit margins of 2014-15 are now much narrower, the industry remains in a net profit position.

 

The thinner profit margins however, will slow herd expansion down in one way: When cattle prices fell and pastureland rents increased, culling rates rose from low to normal levels. This implies that going forward, all herd building will come from heifer retention; as at current price levels there is no motivation for farmers to keep older cows for an additional round of breeding.

 

Due to the interaction between market forces and cattle biology, they can be culled quickly in response to sharp price drops, but take five years or longer to recover after bottoming out. While US cattle prices fell sharply, because much of the revenue drop was offset by a lower cost base, culling rates merely rose to normal levels and not by enough to stop herd growth.

 

Even so, after two years of high selling prices, 2015 opening cattle inventories rose 3.1%, to 91.88 million head, up 3.1% from 2014's 88.14 million. With it no longer being economical to retain older breeding cows, this year will see total cattle herd growth decelerate to 2%, and total inventories reach 93.90 million. While this is still lower than total cattle numbers in 2010 before their downturn began, the 6% total inventory growth over 3 years is the most aggressive US cattle herd expansion seen since the late 1980s.

 

At the same time, because cattle take years to mature, the aggressive retention of heifer and older cows that took place from 2014 through 2015 will guarantee that US cattle numbers and beef production grows at a healthy rate for the next two years. With cattle weights being pushed to all-time highs and slaughter rates recovering, this year's 3.1% in the herd is causing this year's beef output to rise 4.7%, from 2015's 10.82 to 11.33 million tonnes this year. With the full impact of higher cattle weights and slaughter rates yet to be felt, next year will see beef output rise another 3.7%, to 11.76 million tonnes.

     

With the higher cattle numbers and beef production comes an improvement in America's beef trade balance. Always an equally large importer and exporter, the late 2000s saw a five-year spell when America switched from net importer status to briefly become the world's largest beef exporter. First due to a drought-induced drop in cattle numbers, later because of rising US dollar, imports expanded and exports fell, returning it back to a net beef buyer status by 2013.

 

This too is now changing, though slowly. Compared to the first quarter of 2015, America imported 18.2% less beef from Australia, 4.2% less from New Zealand, 39.2% less beef from Brazil and 26.6% less from Uruguay. Imports from Canada and Mexico were 6.3% and 12.3% higher respectively. Nevertheless, with first quarter NAFTA import volumes up by less than 10,000 tonnes, this was easily offset by 62,200 tonne fall in imports from Australia, New Zealand and South American countries.

 

All this is projected to result in a 14% drop in import volumes, from 2015's 1.53 million tonnes to 1.31 million tonnes this year, followed by a 12.5% fall to 1.15 million tonnes in 2017. On the other hand, held back by a high US dollar, exports will rise much more slowly, 1.9% to 1.112 million tonnes this year.  With exports projected at 1.118 million tonnes for 2017, the US should return to net beef exporter status by early next year.

 

At this time, the question on everyone's mind is if America's cattle expansion will continue beyond the price crash that bottomed out earlier this year or flatten out at a lower level than at the previous peak –as it has for the past forty years. For now, after 50 years of secular decline, the odds still favor a longterm resumption in the growth of America's cattle herd and beef production. However, with pastureland rents rising sharply in southern states, a longterm tendency for cattle rearing to migrate to the northern plains will accelerate

 

Over the short term, the loss of several hundred thousand tonnes of Australian beef from the world market makes room for the pace of export growth to accelerate from now through 2018. Over the longer term, per capita beef consumption in America appears to have bottomed out near 25kg and looks unlikely to fall further. With a domestic market that absorbs 90% of output poised expanding at least 1% yearly and export demand poised to rise by 2% or more, a case can be made for a slow but consistent rise in US cattle numbers and beef production over the coming decade.