From the June/July issue of Drovers CattleNetwork.

While I remain optimistic for the balance of 2015, I wouldn’t “throw caution to the wind.”

As mid-year approaches, there is still plenty of uncertainty surrounding the market, but cattle numbers remain relatively tight, particularly as producers build herds and retain heifers for replacements. After last year’s record prices, it does cause a lot of hand wringing and wondering when the ax will fall. It is a good time to take a look at some of the market fundamentals — mostly the supply. However, demand will still be the key to prices.

Heifer slaughter through the end of May was down 8 percent from a year earlier and the lowest in over 25 years. The sharp drop is further highlighted when judged against a similar sharp drop during the same period in 2014. So, while last year’s calf crop is up 1 percent, according to USDA’s cattle inventory, feeder-cattle supplies remain relatively tight as heifers are held as replacements — at least in the short term. The long-term implication is increased cattle numbers beginning next year. Steer slaughter through the end of May was down 4 percent and also the lowest in over 25 years for the five-month period.

The other part of the herd-building equation, beef cow slaughter, is down 17 percent from a year earlier through the end of May. During the same period a year ago, it was down 12 percent. From the standpoint of cow-calf production costs, prices for diesel fuel are down an average of 22 percent during the first five months of this year compared to a year ago, and with the exception of California, the forage outlook is very favorable following May rains. In eastern Oregon where I live, while the water outlook is far from what it should be, May rains certainly improved the irrigation and grazing situation.

As expected, cattle weights remain heavy and well above a year ago. Heifer carcass weights through the end of May averaged 809 pounds, 15 pounds heavier than a year ago and well above the five-year average of 780 pounds.  Steer carcass weights during the same period were up 27 pounds from a year ago and averaged 884 pounds. This compares to the five-year average of 842 pounds. So, weights have partially compensated for a 7 percent year-to-date drop in slaughter from a year ago, leaving beef production for the same period down 5 percent.  

Prices for steer calves during the first half of the year were up an estimated 28 percent from a year ago, while heifer-calf prices rose 30 percent. Feeder steers, during the same period, increased an estimated 20 percent from a year earlier, while cull-cow prices were up 16 percent during the same period. While prices for these same classes of cattle during the second half of 2015 will fall below sharply rising year-earlier prices, all will post strong year-over-year gains with steer calves up 10 percent, heifer calves up 12 percent, yearling steers posting a 5 percent increase and cull cows up 6 percent.

Consequently, profitability to cow-calf operations this year may surpass last year’s record by perhaps as much $100 per head, depending upon individual circumstances. My guiding principal in that matter is that when it comes to analyzing ranch economics, “there is no one size fits all,” but there are reasonable sideboards to provide guidance.

The predatory nature of the industry is at play, and contrary to last year, feedlot margins will remain underwater all year. Feeder-cattle prices during August through December 2014 drove breakeven prices to the low-to-mid $170s during first-half 2015 when those cattle were marketed and led to sharp losses compared to a year earlier. While breakeven prices have come down for cattle placed during the first five months of 2015, they are still likely well above expected Choice steer prices. The only remedy to that situation is increased feeder-cattle supply relative to demand and lower prices. That is my outlook for 2016 — increased feeder-cattle supplies and lower prices. 

While I remain optimistic for the balance of 2015, I wouldn’t “throw caution to the wind.”

 

Returns to cow-calf production

Dollars per head

2013

243.05

2014

548.00

2015*

658.00

2016*

519.00

*Sterling Marketing Forecast