Cattle markets have disappointed for most of 2016, but it was a dive into extreme territory in mid-October that brought producer frustration to a boil. Auction prices did nothing but retreat from mid-August, leaving calf and yearling prices 30% below 2015 and 60% below 2014. It was nearly Halloween before the summer lows were established.

How did cattle markets fall that far that fast? That’s the question many ranchers are asking as they try to find justification in a market that has erased essentially all of the $500-plus per cow average profits they posted in 2014.

In October, we described how market direction will be dictated by increasing supplies of red meat and poultry. (See “A Mountain of Meat Looms,” Drovers, Oct. 2016, page 7.)That issue hit mailboxes about the time the bear was mauling all classes of cattle, driving fed cattle prices to less than $100 per cwt for the first time since December 2010. At one point, calf prices dropped 13% in a three-week period, causing most analysts to declare them undervalued.

Discussions of USDA data-sets such as red meat and poultry supplies, however, have fallen flat in ranch country. “How can we have an over-supply of beef when just two years ago we were told cow numbers were at 60-year lows,” is a common question among ranchers. And, they wonder, “Why haven’t retail beef prices declined accordingly?”

The answer, economists say, is the U.S. cattle inventory is not the sole determinant of beef supplies.

“Beef supplies are determined by slaughter totals, carcass weights and beef imports, minus beef exports,” says Jim Robb, senior agricultural economist for Livestock Marketing Information Center (LMIC) in Denver, Colo.

Inventories are just the starting point. The current supply-demand equation traces back to the Jan. 1, 2014, inventory report which counted 87.7 million head, with 29 million beef cows. The tally was the lowest number of beef cows since 1951, a result of the prolonged drought across much of the Central Plains. The small number of cows contributed to a shrinking supply of feeder cattle and the subsequent record prices posted in the fall of 2014.

“Grass plus profits equals expansion,” says John Nalivka, president, Sterling Marketing, Vale, Ore. “Aver-age ranch profits totaled $518 per cow on a cash basis in 2014. Even with the decline in prices from 2014 to 2015, we saw average per cow profits of $433 last year. This year I project a 65% decline to per cow profits of $144 using annual average calf prices.”

Those hefty ranch profits encouraged cow herd expansion, and the Jan. 1, 2016 inventory report estimated the U.S. beef herd had reached 92 million head, a 3% gain from two years earlier, with 30.3 million beef cows, a gain of 4% in two years. The increase in cow numbers added 1 million additional feeder cattle to the 2016 supplies.

Increasing supplies of feeder cattle means additional cattle in feedyards, and ultimately increasing slaughter numbers. In 2015, the year when calves from the 2014 record-low cow numbers went to market, the number of steers and heifers counted at commercial slaughter plants totaled 23.04 million head. This year, according to projections from Sterling Marketing, steer and heifer slaughter will be up 5.8% to 24.38 million head. Another 3.6% increase is projected next year.

Those increasing slaughter numbers translate into a 5.9% increase in beef production for 2016, Nalivka says. “Total 2015 beef production was 23.698 billion pounds, and we project an increase to 25.091 billion pounds this year. That translates to about 55.6 lb. of beef per capita.”

The full supply-demand picture, however, must also consider the increases in pork and poultry production. During the January to September 2016 period, total production of red meat and poultry increased 3%. That includes a 2.5% increase in poultry and a 1.4% increase in pork from the same period in 2015.

And there’s more on the way. LMIC projects increasing supplies for both beef and pork during every quarter in 2016, 2017 and 2018. Enough, USDA projects, to provide 218 lb. of red meat and poultry on a per capita basis by 2018, an increase of 7 lb. per person from 2015.

With increasing supplies of red meat and poultry, ranchers are questioning the impact of beef imports on the price of their calves.

“[The U.S.] imported 3.37 billion pounds of beef in 2015,” Nalivka says. “That was a 14% increase over the previous year and was driven by the Australian drought. This year the situation has reversed, as our beef imports are down nearly 12%.”

Imports will represent about 11.6% of the total beef supply this year, which is nearly offset by beef exports on a weight basis nearly match imports. This year beef exports are up 9.3% and are projected to reach a total of 2.48 billion pounds.

However, “the dollar value of our beef exports in recent years were much greater than imports,” Robb says. “We must remember we’re exporting a lot of product, such as hearts, tongue and offal, that have a much greater value overseas than they do in the U.S.”

Still, any discussion about beef ’s current supply-demand fundamentals seems in conflict with retail beef prices. While it’s true that live cattle prices have declined much more rap-idly than reported retail beef prices, those retail prices are lower this year.

According to the Consumer Price Index for September reported by the Bureau of Labor Statistics, the price of uncooked hamburger was 9% lower this year than during September of 2015. Similarly, the price of steaks was 5% lower than during September 2015.

Still, those declines pale in comparison to the fall in live cattle prices, and add to the frustration of ranchers.

“Prices are sticky at retail,” Robb says, meaning retailers don’t like to yo-yo prices for any product. “There’s a lot of beef sold at prices well below the reported prices. The government collects a small sample and they report the price on the label. What doesn’t get reported is prices for beef features by grocery stores.”

“Of course, much more than producer-level costs are included at the retail level,” he adds. “Expenses for harvesting the animal, to transportation, to labor at the grocery have not retreated at all. So, percentage wise, retail prices always drop well less than those at the farm level.”

And retail beef price reports, Robb notes, don’t account for price discounts offered to customers with store loyalty cards. Those loyalty cards allow customers to earn all available store discounts on beef and other products.

 

Note: This story appears in the November/December issue of Drovers.