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Weighing The Market

published: February 19th 2021
by: Wes Ishmael

Feed costs challenge improving fundamentals

Cattle prices continue to languish, a year into the pandemic, but supply fundamentals suggest im-provement as this year wears on and significant improvement for the next couple of years.
    “Cattle on-feed numbers are currently high but will moderate through the remainder of the year with smaller placements and smaller calf numbers. Further, the currently very large carcass weights will shrink into the spring as winter weather has its impact,” says Stephen Koontz, agricultural economist at Colorado State University, in a recent issue of In the Cattle Markets.
    “The number of steers and heifers going through our packing plants over the course of the next several years is going to shrink. As it declines, so will our beef production, and prices are going to get higher. We’ll see a transition to a higher trending, more profitable cow-calf operator, seedstock operator and cattle feeder,” said Randy Blach, CattleFax CEO, during the recent annual Internation-al Livestock Forum hosted by Colorado State Univer-sity and the National Western Stock Show
    As fed cattle supplies decline, Blach noted fed cattle slaughter capacity utilization will drift back toward 100%, mostly after this year. It ranged from 102% in 2016 to 110% last year as cattle numbers ran ahead of hook space.
    For current context, analysts with USDA’s Eco-nomic Research Service (ERS) project the annual five-area direct fed steer price for this year at $115/ cwt. That’s from February’s World Agricultural Supply and Demand Estimates (WASDE). Average prices are forecast at $113 in the first and second quarters, $114 in the third quarter and $119 in the fourth quarter.
    Shorter term, Koontz sees more potential for fed cattle prices than those for calves and feeder cattle, due to the run up in feed prices.
    ERS estimates the expected 2020-21 season-average corn price received by producers at $4.30/bu. That’s $1 more than the loftiest expectations just a few months ago.
    “Even with the substantial increases in corn and soybean futures prices for nearby contracts, the current corn basis across the Central and Southern Plains remains strong – cash activity and price levels have followed the futures rally,” Koontz explains. “In this setting, these increases are not temporary but rather permanent. And permanent for cattle feeding cost-of-gains.”
    That’s before considering the potential impact of current drought and how it could unfold heading toward summer.
    Potentially, moisture chances could improve for some of the nation’s driest areas. Early indications suggest the current La Niña is weakening and could become neutral by summer.
    That was one of the key messages from Allen Dutcher, Extension agricultural climatologist at the University of Nebraska-Lincoln, during the Virtual BEEF Experience.
    Likewise, according to the latest update from NOAA’s Climate Predic-tion Center, “La Niña is ex-pected to continue through the Northern Hemisphere winter 2020-21, with a po-tential transition to ENSO-neutral during the spring 2021.”
    Drought and higher feed costs could impact cow-calf returns significantly, according to analysts with the Livestock Marketing Information Center (LMIC), in early February. However, they believe higher year-over-year calf prices will support positive returns.
    In the January Live-stock, Dairy and Poultry Outlook, ERS projected the average feeder steer price (750-800 lbs., basis Oklahoma City) at $134/ cwt. in the first and second quarters, $139 in the third quarter and $140 in the fourth quarter for an annual average of $136.75.
    Early release tables for USDA’s Long-Term Agri-cultural Baseline Projec-tions are more bullish. They estimate the average feeder steer price this year at $138.50 and then just over $148 the next two years. Those projections peg the average five-area fed steer price at $114 this year, $120.99 in 2022 and $117.39 in 2023. But, that was with the season average corn price projected at $3.60 to $3.65/bu. from now through 2024-25.
Beef disappearance lower
    ERS projects beef production at 27.54 billion lbs. this year, which would be 388 million lbs. more (+1.43%) than last year. Total red meat and poultry production is estimated to be record large at 107.60 billion lbs., which would be 1.08 billion lbs. more (+1.01%) than last year.
    However, ERS expects domestic per capita meat disappearance to decline about 1%, due to increased exports and reduced beef imports.
    Keep in mind that do-mestic consumer beef de-mand last year was extraordinary.
    In fact, based on the Annual U.S. Consumer Beef Demand Index, Blach said 2020 beef demand in the U.S. was the most in 30 years.
    “That speaks to the quality of the product that we’re producing in this country,” according to Blach. He explained Prime and Choice beef production increased from ap-proximately 11 to 12 billion lbs. in the early 2000s to around 18 billion lbs. last year.
    Along the way, the Choice-Select spread maintained its strong pace, while the spread between Choice and the upper two-thirds of Choice grew. The Prime-Choice spread sag-ged last year, due to the dearth of restaurant business.
Beef exports rebound
    Foodservice restrictions in many major markets impacted U.S. beef exports significantly last year, but they trended higher late in the year, bolstered by strong retail and holiday demand.
    U.S. beef exports were 5% lower last year, in volume (1.25 million metric tons—mt) and value ($7.65 billion), but they finished 2020 with a near record December, according to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF).
    December beef exports were 8% more year over year, the most in nearly 10 years. Export value in December was $744 million, up 9% from a year earlier and the second highest total on record.
    “Consumers across the world responded to the COVID-19 pandemic by seeking high-quality products they could enjoy at home, and U.S. beef and pork definitely met this need,” says Dan Halstrom, USMEF president and CEO. “We expect these retail and home-delivery demand trends to continue even as sit-down restaurant dining recovers, creating robust opportunities for U.S. red meat export growth.”
    Beef export value per head of fed slaughter was $349.19 in December, up 9% year over year and the highest level since April. For the year, beef export value per head of fed slaughter was down 2% at $302.31.

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