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Weighing The Market

published: May 13th 2022
by: Wes Ishmael

Snugger immediate fed cattle supplies, before ballooning with the elevated feedlot placements of recent months, helped negotiated cash prices gain in April. The five-area direct fed steer price was $141.66/cwt. on a live basis, which was $20.78 higher year over year.
    Gains came despite the counter-seasonal decline in wholesale beef prices, apparently due to nascent challenges to domestic consumer beef demand, wrought by historically high retail beef prices and inflation across the board. 
    Nose-bleed high input costs and ongoing uncertainty related to drought and the war in Ukraine continued to constrain calf and feeder cattle price potential. However, continued cow liquidation (more later) and the aforementioned pace of feedlot placements suggest higher prices as the year unfolds.
    USDA’s Economic Research Service (ERS) increased the anticipated annual feeder steer price this year to $163/cwt., in the April Livestock, Dairy and Poultry Outlook.
    “With higher placements in the first quarter, it is likely that calves that might have remained on pastures later in the year were pulled forward. As a result, from last month, tighter anticipated feeder cattle supplies in second-half 2022 will likely support elevated prices,” according to ERS analysts.
    The projected third-quarter average feeder steer price (basis 750-800 lbs. Oklahoma City) was raised $4 to $165; the fourth-quarter price was bumped $6 higher to $172.
Cow liquidation continues
    Ongoing drought and elevated cattle cow slaughter point toward further beef herd liquidation.
    The first week of May, 63.9% of the nation was experiencing either abnormally dry conditions or some degree of drought, compared to 64.1% the previous week and 65.6% the previous year, according to the U.S. Drought Monitor.
    The same week, approximately 56% of the nation's cattle inventory was in areas experiencing drought. That included 85% of the cattle in Texas, 79% in Kansas, 98% in Nebraska, and 100% in Oklahoma.
    “Through mid-April, beef cow slaughter was up 16.9% year over year; a surprisingly strong rate of cow slaughter for this time of year,” according to Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his late-April market comments. “This likely reflects continuing drought impacts carried over from last year, combined with very strong cull cow prices and limited forage prospects going forward. The fast pace of cow slaughter thus far implies the likelihood of significant beef cow herd liquidation in 2022.”
    Peel explained the pace of beef cow slaughter suggested an annual beef herd culling rate of 13.8%, a record in data back to 1986. Culling at that level suggests the beef cow inventory would likely decrease by 4% year over year and decline below 29 million head Jan. 1, 2023. That would be the largest annual beef cow herd decrease since the mid-1980s.
    However, Peel said it was unlikely the pace of culling would continue at that rate throughout 2022.
    By way of comparison, he explained if beef cow slaughter averaged 9% more year over year — the same as last year and unlikely at this point — it would imply an annual culling rate of just less than 13%, still a record. The 2023 beef cow herd would be roughly 29.2 million head, down about 3% year over year.
    On the other hand, if beef cow slaughter ended up 13% more year over year, net beef herd culling would be more than 13%, resulting in a Jan. 1 beef cow inventory of approximately 29.0 million head (3.5% less year over year).
    “Dramatic and immediate improvement in drought conditions could allow the industry to avoid these rather dire results,” Peel said. “The next few months will likely have impacts on the cattle industry for several years. Drought conditions that result in the levels of liquidation described above would also prevent retention of replacement heifers. This implies that, if conditions do not improve until late this year or into next year, better conditions in 2023 would, at best, allow the industry to stabilize inventories and lay the groundwork to begin recovery in 2024 at the earliest.”
Beef exports remain strong
    U.S. beef exports set another new value record in March, according to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF).
    Beef exports totaled 126,285 metric tons (mt) in March, up 1% from a year ago, the third most on record, while value climbed 33% to a record $1.07 billion. First-quarter exports increased 6% to 353,852 mt. Value in the first quarter was 41% more than last year at just over $3 billion.
    “Global demand for U.S. beef has eclipsed anything I have seen in many years in the meat business,” said Dan Halstrom, USMEF president and CEO. “While this momentum is fueled by mainstay markets such as South Korea, Japan and Taiwan, demand is also very strong in China/Hong Kong and key Latin American markets, while exports to the Middle East have rebounded impressively.”
    March beef export value equated to $472.73 per head of fed slaughter, up 36% from a year ago. The first quarter average was $474.10 per head, up 41%. Exports accounted for 14.7% of total March beef production, up from 14.5% a year ago, while the ratio for muscle cuts was steady at 12.7%.
    Halstrom cautioned that first-quarter results did not fully reflect the impact of recent COVID-19 lockdowns in China that slowed product movement and forced many restaurants to suspend or limit service. These obstacles are likely to have a greater impact on April and May export data. While beef demand has been very resilient, he noted inflation represents a potential headwind.
    “Consumers throughout the world have shown how much they value the quality of U.S. beef, but disposable income is under increasing pressure as they pay more for energy and other daily needs,” according to Hailstorm. He added that pork, beef and lamb exporters continue to face logistical obstacles and delays when moving product overseas.

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