Beef, cattle profit margins likely poor now to start of new year

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Despite considerable discussion about shortages of cattle and calves looming for the remainder of 2012, 2013, and beyond, the total number of steers and heifers on feed in feedlots of 1,000 head or more on October 1, 2012 was 2.7 percent below October 2011 (second highest in the last 10 years), but 1.8 percent above October 2010. It was the third highest October 1 inventory of steers and heifers on feed in 1000-plus-head lots (behind 2006 and 2011) and the second highest steer inventory (behind 2006) in the last 10 years. The heifer share of total cattle on feed in 1000-plus-head lots declined in October 2012 to its lowest level since October 2006. The October 2012 inventory of cattle on feed for 120 days or more—either before or after adjusting for those that would normally be on feed for more than 120 days—was the highest October inventory since the series began in December 1995. Further, beef packers have reduced kills for several weeks in an attempt to pressure fed cattle prices lower and improve their currently negative profit margins. Year-to-date cumulative weekly federally inspected cattle slaughter through November 3, 2012, was 4 percent below both 2011 and 2010 and 2 percent below 2009. Despite the reduced slaughter, heavier dressed weights have resulted in beef production through November 3, 2012, that was not quite 2 percent below same-period in 2011 and 2010.

All of these factors would ordinarily suggest ample supplies of fed cattle through at least the end of 2012, which should lead to lower fed cattle prices. However, fed cattle prices have increased 12 percent from their 2012 low in mid-July and, for the week ending November 3, 2012, were almost 4 percent and 29 percent above prices at the same points in 2011 and 2010. As a result, profit margins for both cattle feeders and beef packers will likely remain poor from now into 2013. Exacerbating the situation further for packers is the decline in byproduct values that began in mid-September.

On the demand side, retail beef prices appear to have reached at least a temporary upper limit, seemingly unable to break much above $5 per pound (Choice beef). Total red meat production for 2012 is projected slightly lower than in 2011, as is per capita disappearance. While poultry per capita disappearance was down during the first half of 2012, it is projected to be down only about 2.4 percent for all of 2012, with total red meat and poultry per capita disappearance down less than 1.5 percent. Relief for either cattle feeders or beef packers looks unlikely over the coming year, except at the expense of one or the other, until higher cattle prices are matched by higher retail beef prices, feeder cattle prices decline, and/or lower corn prices result in feed costs low enough to allow cattle feeding profits. Feeder cattle prices will likely move higher over the longer term as feeder cattle supplies dwindle, reflecting heifer retention for breeding and successively smaller calf crops. Corn prices are not likely to decline much until corn supplies increase significantly, which is not anticipated before harvest begins in fall 2013. How long the apparent $5 per pound ceiling on Choice beef will hold is uncertain, but perhaps beginning with October’s Choice beef price of $5.03, the ceiling will likely be solidly exceeded sometime during the last quarter of 2012 or first half of 2013, which should provide some relief for packers. At $4.77, the All-Fresh beef price set a new nominal record in October, reflecting the continuing popularity of ground beef, and will likely help Choice beef break the $5 mark.



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