Cow/calf producers are in the middle of a herd rebuilding process that likely will span the next few years as calf prices and pasture availability coincide, but there could be problems.
Carcass weights jumped during the latest extended drought period as a way to compensate for declining slaughter numbers. Rising weights have not been able to keep up with a shrinking herd, but they have mitigated the decline.
Slaughter cattle weights continue above year-ago and multi-year averages, and if the pace of growth in cattle weights continues, it will curtail the amount of herd growth the market needs, said Derrell Peel, Oklahoma State University extension livestock marketing specialist.
That’s not to say the market may not overshoot the mark on production at some point. They always do because there is no visible market point that signals equilibrium. Only the pain of economic losses from oversupply can call for herd cuts, and a more moderate growth in carcass weights would be less detrimental to herd expansion.
BEEF DEMAND THE ULTIMATE DRIVER
Ultimately, demand for a product, in this case, beef, is the driver of the supply chain that feeds that product’s availability. Without demand, there is no need for production.
“Thus, the combination of domestic and international demand for US beef will be critical to determine how much beef cow herd expansion is needed,” Peel said. “Per capital beef consumption will grow as beef production expands, but demand will determine at what price level this consumption will occur.”
Economics textbooks say consumers will pay just enough to ensure that producers produce just enough of a product for that level of consumption. But since the cow/calf producer is several rungs down the ladder of market feedback from consumers, the response to rising or falling consumption or demand is muted and often slow, since market feedback in the form of higher prices for their calves must filter back from the grocery store.
FEED ALLOWS EXPANSION
Beef cow herd expansion tried to begin several years ago, but extended drought meant pastures were not able to support a larger herd. Producers tried to rebuild herds several times only to be forced into further liquidation by dry pastures.
The return of El Nino in the equatorial Pacific Ocean brought rain to the central and eastern US starting last year, allowing pent-up cow herd expansion to proceed. The beef cow herd grew 2.1% in the first full year of expansion last year, which Peel said was faster than typical.
Years of drought and the aggressive cow culling that goes along with it mean the average herd is young and productive, allowing for a sharp drop in cow culling last year that preceded this year’s more aggressive heifer retention.
Between lower annual beef cow slaughter and more aggressive heifer retention, USDA numbers indicate a year-over-year beef cow herd expansion as of Jan. 1, 2016, of 2.5% to 3.5%, or 30.4 to 30.7 million head.
CASH CATTLE MARKET QUIET
Cash cattle markets, after trading $2 per cwt higher last week, were silent Tuesday. Packer buyers were not bidding, while sellers were seeking $151 to $152 on a live basis and $240 on a dressed basis. Cattle last week sold at mostly $147 to $148 with some up to $149 live and $232 to $234 dressed.
The USDA’s beef cutout values Tuesday were lower, with the choice cutout at $233.48 per cwt, down $0.51 and select at $228.17, off $0.66. Volume was light to active with 120 loads of fabricated cuts being sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Monday was $217.38, up $0.35, compared with Tuesday’s Aug settlement of $213.95, up $0.10.