Beef production & fed cattle price outlook

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So far in 2013, fed cattle prices have generally been disappointing, compared to forecasts in 2012 that called for prices in the low $130s for much of the first half of the year. Instead, slaughter cattle prices averaged $125.12/cwt for the first six months of the year, basis the 5-area market, ranging from $120.04-$128.44/cwt. The Spring high was posted in the first week of May, while the market appeared to find support for a summer low at about $120/cwt for the last several weeks of June.

In addition to weaker consumer demand during the first half of the year, higher-than-expected beef production contributed to the lower-than-expected fed cattle prices. Based on weekly data, federally inspected (FI) beef production totaled about 12.57 billion pounds from January through June 2013, which is only about 0.1% lower than during the same six months of 2012. Generally, smaller cattle inventories over the last several years were thought to result in lower beef production in the first half of 2013, even though cattle dressed weights generally trend higher each year. From January through June, FI cattle dressed weights averaged 791 pounds, compared to 784 pounds last year. While that 0.8% increase isn’t far from the long term trendline, it is well below the 2.3% increase seen in 2012 as a result of increased feeding of beta agonists last year.

Cattle slaughter numbers, of course, are the other driver behind changes in beef production. From January to June 2013, FI cattle slaughter totaled 15.9 million head, about 1% less than in 2012. While that decrease in slaughter was enough to offset the modest increase in dressed weights, it is particularly interesting this year to examine the make-up of total cattle slaughter numbers. Steer slaughter, which generally comprises about 46% of total cattle slaughter, was 1% lower during the first half of 2013. Fed heifer slaughter, though, was 4.1% below the same period a year ago. The drop in heifer slaughter during this time indicates that producers had made plans in the latter part of 2012 to retain additional beef heifers for breeding. The fact that beef cow slaughter ran about 11% below year-ago levels during January and February further supported expansion possibilities in the beef cow industry. However, those plans changed in early Spring as feed prices remained high and dry conditions prevailed across key areas of cow-calf country. This likely contributed to the increase in feeder cattle placements during March and April as some of the retained heifers were placed on feed. More dramatically, beef cow slaughter averaged 15% higher than a year ago on a weekly basis from mid-March through mid-May. During the first six months of 2013, year-over-year changes in dairy cow slaughter were about the mirror-opposite of beef cow slaughter, with sharp increases at the beginning of the year and more steady levels in recent weeks. 

So, for the first half of 2013, fed steer and heifer slaughter was 2% lower than in 2012 while combined beef and dairy cow slaughter was 3.4% higher. This means beef production shifted towards more hamburger and processed beef items, as those generally result from non-fed cow slaughter. As we look towards the second half of 2013, it is likely that much-improved pasture and range conditions and prospects for much lower corn prices will result in increased interest in beef cow herd growth. Therefore, beef cow slaughter is likely to drop in the months ahead and result in 10-12% less cow beef production compared to the second half of 2012. While cow slaughter and cow beef production will be the key to how much total beef production drops in the second half of 2013, fed steer and heifer beef production will likely decline around 4% compared to the previous year. Assuming those declines in both fed and non-fed beef production, the second half of 2013 will likely result in a counter-seasonal decrease in beef production of 2% compared to the first six months of the year. Normally, total beef production is higher in the second half of the year than the first half.  For the year, beef production is expected to be about 25.1 billion pounds in 2013, which would be about 3.2% less than in 2012.

Lower beef production in the second half of 2013 will be supportive to fed cattle prices. Likely, slaughter cattle prices will average in the $122-125/cwt range through the third quarter. Fourth quarter prices could average in the upper $120s, reflecting a normal seasonal pattern to prices. While those prices are not much different than the first half of the year, they are 2.5-3.0% higher than in the second half of 2012. And, still higher prices could materialize if consumer demand improves through the end of the year.

Looking ahead to 2014, cattle slaughter numbers will likely decrease by 6-7% for the year. Assuming dressed carcass weights increase by about 1%, beef production for the year will decrease 5.5-6.0%. This should support fed cattle prices in the upper-$120s to mid-$130s throughout the year, with an annual average price around $130-134/cwt.

Source: Darrell Mark

The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.

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