In two short years cattle markets have flipped from record highs to depressing lows. The supply-starved market that brought record prices in the fall of 2014 are but a distant memory. Ranchers shipped semi loads of calves to market this fall that were valued at $70,000 less than the same trailer loads in 2014.

“How did this happen,” and “What does it mean going forward?” Those questions are foremost on rancher’s minds this year.

“Profits plus grass equals expansion,” says John Nalivka, president of Sterling Marketing, Inc., Vale, Ore. “We saw rapid herd rebuilding for two years as both cow and heifer slaughter were down sharply. Beef cow slaughter was down 14% in 2014 followed by a 4% drop in 2015. And while sharply reducing herd culling in order to take advantage of higher prices, cattlemen also bred more heifers.  Heifer slaughter fell 8% in 2014 and then was down another 12% in 2015.”

Nalivka calculates average profit per cow in 2014 was $518. That was the economic incentive to expand herds and Mother Nature cooperated with adequate moisture for grass and forage production across most of cattle country.

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.

The expansion of 2015 and 2016 led to increased beef production – 5.8% more in 2016, and another 4.4% increase is projected next year by USDA’s National Agricultural Statistics Service. But beef is just part of the puzzle.

“Per capita supplies of total red meat and poultry will be 7% higher this year, and increase another 8% next year,” Nalivka says.

And there’s more on the way. The Livestock Marketing Information Center, Denver, CO, projects increasing supplies for both beef and pork during every quarter in 2016, 2017 and 2018. Enough, USDA projects, to provide 218 pounds of red meat and poultry on a per capita basis by 2018, an increase of 16 pounds per person from 2014.

The growing glut of red meat is reflected in cattle prices and profit margins. Sterling Marketing produces a weekly Profit Tracker for both beef and pork finishing programs. Red ink has flowed in closeouts for both cattle and hog producers this fall, with last week’s data showing losses of $116 per head for cattle and $35 per head for hogs.

For ranchers, the declines in feeder cattle and calf prices have been devastating. Oklahoma City auction prices for 750-800 lbs. feeder steers were 35% lower in October than the same period in 2015. Calves weighing 450-500 lbs. at the same auction were 38% lower in October 2016.

The October 2015 prices were 25% below the 2014 peak of $299 per cwt. Still, ranchers saw average per cow profits of $433 last year, Nalivka says. “This year I’m projecting a 65% decline in per cow profits to about $154.”

And that may be the best return ranchers see for a while. Given the Sterling Marketing price forecast, Nalivka projects ranchers will lose an average of $24 per cow next year.

“I project we will see another 14% to 16% decline in the price for feeder cattle and calves next year,” he says. “I am projecting a third quarter price of $118 per cwt for Oklahoma City yearling feeders, and $136 per cwt for calves.”

Additionally, Sterling Marketing forecasts show fed cattle prices in the third and fourth quarter of 2017 at $95 and $96, respectively, with an annual average of $100. If accurate, that would represent a $48 decline in the annual average for fed cattle from 2015.

While those forecasts seem bleak, there are opportunities.

Derrell Peel, Oklahoma State University extension economist says, “Retained ownership may be attractive for cow-calf producers depending on calf weaning weights and management flexibility.” And he says the price roll-back on calves this fall may offer opportunities for stocker operations. “Not only does the current market suggest stocker opportunities in general but also that the best buying opportunities are for animals somewhat heavier than typically purchased for winter grazing.”  

Nalivka agrees that backgrounding your calves may prove profitable.

“If you already have the forage, backgrounding can be an appealing option,” he says. “As long as your marginal cost of an added pound does not exceed the marginal revenue from that additional pound of beef, the economics are on your side. The key – you must know your costs of forage (if produced) and your cost of gain for backgrounding whether in a dry lot or on grass.”

Those opportunities may also carryover to finishing programs.

“Current retained ownership in the feedlot continues to look positive based on the feeder cattle market and expected breakevens based on the cattle cost and feed cost – both are down sharply,” Nalivka says.  “However, there is plenty of pessimism concerning the 2017 steer prices.”        

The editors at AgWeb.com are taking a look at experts’ projections for a variety of commodities in 2017 to help you succeed and be profitable in the coming year. Tune in periodically over the next six weeks as we add outlooks for corn, wheat, cotton, cattle, machinery and more.