Livestock & Feed Bussiness Worldwide: July 2016

 

 

by Eric J. BROOKS

 

 

America's cattle market cycle has turned but its momentum will bolster American beef's output and trade position for several years to come. Feeder cattle and live cattle have been breaking price records and setting all-time highs above US$230/cwt and US$170/cwt, respectively. But these rallies were 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. But the extra steaks could not be absorbed by the hamburger-happy US market. On the other hand, a high dollar made it awkward to export them. The result was 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 today. 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 by more expensive feed. Hence, while the exceptional profit margins of 2014-15 are much narrower now, the industry remains in a net-profit position.

 

The thinner profit margins, however, will slow herd expansion down in one way. When cattle prices fall and pastureland rents increase, culling rates rise from low to normal levels. This implies that, going forward, all herd building will come from heifer retention.

 

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 after prices had bottomed out, it takes five years or more to restore the culled numbers.

 

But while US cattle prices had fallen sharply, much of the revenue drop was offset by a lower cost base, leaving culling rates at normal levels, which were not enough to stop herd growth. Indeed, after two years of high selling prices, 2015's opening cattle inventories were up 3.1%, to 91.88 million head from 2014's 88.14 million. Older cows being not too productive, total cattle herd growth this year will decelerate by 2%, with total inventories of 93.90 million.

 

While this is still lower than the total cattle numbers seen in 2010 before their downturn began, the 6% total inventory growth over 3 years has been the most aggressive US cattle herd expansion 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 will grow at a healthy rate in the next two years. With cattle weights being pushed to all-time highs and slaughter rates recovering, this year's 3.1% herd growth will cause 2016's beef output to rise 4.7%, from 10.82 million tonnes in 2015 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 higher cattle numbers and beef production come an improvement in America's beef trade balance. America has always been both a large beef importer and exporter. But the late 2000s saw the country switch from net importer to, though briefly, become the world's largest beef exporter.

 

But due to a drought-induced drop in cattle numbers, later compounded by a rising US dollar, imports expanded and exports fell. By 2013, it was back to its old status as a net beef buyer. 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 from Brazil and 26.6% less from Uruguay. Imports from Canada and Mexico were 6.3% and 12.3% higher, respectively, however. Nevertheless, with first quarter NAFTA import volumes up by less than 10,000 tonnes, this was easily offset by a 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, by 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 whether America's cattle expansion will continue beyond the price crash that bottomed out earlier this year or will it flatten out at a lower level than at the previous peak – as it has for the last 40 years. For now, after 50 years of secular decline, the odds still favour a long-term resumption in the growth of America's cattle herd and beef production.

 

However, with pastureland rents rising sharply in southern states, a long-term 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 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.

 

 

The full article is published on the July 2016 issue of LIVESTOCK & FEED Business. To read the full report, please email to inquiry@efeedlink.com to request for a complimentary copy of the magazine, indicating your name, mailing address and title of the report.