Editor’s note: The following was written by Lee Schulz, Iowa State University Extension livestock economist, for the university’s August Iowa Farm Outlook newsletter.
Fed cattle prices started off the year strong. Since then, fed steer prices have consistently fallen below levels observed a year earlier as prices averaged $117/cwt during the April through June quarter, $15/cwt lower than during 2017’s second quarter. Fed cattle prices during July averaged $111/cwt, $8/cwt lower than in July 2017.
There are plenty of explanations for why fed cattle prices are now lower. On the supply side, more beef often means lower prices. Beef production follows trends in cattle slaughter, and slaughter has been above last year in five of the first six months of the year.
Slaughter pace, and beef production, picked up substantially during April and May as daily slaughter volume rose 7 percent and 6 percent, respectively, above a year earlier. Heavier weights pushed beef production up even more than slaughter volume as beef production rose 8 percent during April and 7 percent during May. June cattle slaughter and beef production fell slightly, but July cattle slaughter was up again.
On the demand side, one possible explanation of lower cattle prices is that retail beef prices have not dropped enough to spur the added consumption that is required for the higher level of beef production.
According to data provided by the Bureau of Labor Statistics and USDA, all fresh retail beef prices in the first half of 2018 were less than 1 percent lower than in the first half of 2017. Per capita consumption only increased 0.5 percent over this time.
Further reductions in retail prices will likely occur, and these lower prices can help support fed cattle prices. In the meantime, robust economic growth, rising incomes and one of the lowest unemployment rates on record could help spur beef demand.
Exports have been a bright spot for beef demand this year. According to data released by the USDA and compiled by the U.S. Meat Export Federation, January through June beef muscle cut export volume was up 14 percent and value was up 23 percent compared to the first half of 2017.
Beef variety meat exports make an important contribution to cattle carcass value as well. Those exports are down 4 percent by volume but still up 2 percent by value for the first half of the year. According to USMEF calculations, beef export value has averaged about $318 per head of a slaughter steer.
One unknown hanging over the beef market is the impact of higher tariffs on beef muscle cut and offal exports, which will be felt even more strongly in the second half of the year as tariffs on many products exported to China and Canada increased in early July.
July is one of the USDA’s larger months for providing surveyed cattle numbers. The Cattle on Feed report tells about potential beef supplies in the next six months. Herd inventories revealed in the mid-year cattle report have longer-term implications.
The Cattle on Feed report confirmed that the on-feed inventory continues to be larger than a year ago, as the inventory for feedlots with capacity of over 1,000 head was 4.3 percent larger on July 1, 2018, than a year ago.
Despite reported larger auction and direct trade volumes and more feeder cattle imports from Mexico and Canada, the modest increase in June feedlot placements reflects lower placements concentrated in the heavier weight categories, partially offsetting larger placement volumes in lightweight categories.
Smaller heavy weight placements in March through June suggest tighter fed cattle supplies heading into late summer and fall, setting the stage for a possible price rebound from summer lows into the fall months.
Declines in corn prices have been supportive of prices for both calves and feeders this summer and are expected to remain supportive this fall. The futures markets are currently pricing in value for feeder cattle and calves, making it a good time to review options for offsetting risk and protecting value.
Current calf and feeder cattle prices are well above break-even prices suggested by cattle feeding margin projections.
One last important note regarding the Cattle on Feed report was the number of heifers on feed was, as expected, larger. The number of heifers on feed on July 1 was up almost 8 percent over July 1, 2017. This was the second largest July number of heifers on feed behind only July 2001.
The mid-year cattle inventory report has been a casualty of budget pressures in recent years, so making comparisons is a little less insightful.
Still, the report is important as it allows market participants to calibrate supply expectations for the next couple of years.
The report provides the first estimate of the nation’s 2018 calf crop along with an update regarding how rapidly the U.S. cattle herd is increasing. Roughly three-quarters of the calf crop already hit the ground this spring, and the remainder will be born this fall.
The July survey asks producers to report the calf crop for the entire year of 2018. The calf crop is expected to be 1.9 percent larger than in 2017. The increase in the calf crop implies that cattle slaughter should continue to increase for at least the next 18 to 24 months, but the rate of increase will likely slow.