Herd expansion on hold
August 16, 2023
Notwithstanding the weekly push and pull of grain market wonderments and beef packers reining in production to boost boxed beef prices, cattle prices continued beyond the expectations of many last month. The already bullish outlook grew even brighter.
USDA’s Economic Research Service (ERS) increased projected feeder steer prices (750-800 lbs. Oklahoma City) in July’s Livestock, dairy and Poultry Outlook. Compared to the previous month, ERS increased the average projected third-quarter price by $17 to $241/cwt. and by $20 in the fourth quarter to $246. The 2023 annual price increased $9.87 to $220.49. Prices were projected $23 higher for the first quarter of 2024 at $245. The forecast 2024 feeder steer price increased $23.75 to $245.
“In the first half of 2023, feedlot placements, as well as feeder and stocker sales receipt data, point to a faster pace than what was expected at the beginning of this year,” ERS analysts explained. “Further, improving pasture conditions, relatively cheaper corn prices, and the prospect for higher fed cattle prices have fueled feeder cattle sales. In turn, this likely lowers the expected supply for feeder cattle available in the second half of 2023, which will likely further elevate feeder cattle prices.”
Likewise, ERS boosted expected fed steer prices (five-area direct) for the rest of this year and next, in the August World Agricultural Supply and Demand Estimates (WASDE).
Based on strong packer demand, ERS increased the projected third-quarter fed steer price by $6 compared to the previous month to $184/cwt., and the fourth-quarter price by $7 to $190 for an annual average of $178.50, which was $3.20 more than the previous estimate. Projected fed steer prices increased $2 for next year at $188 in the first quarter, $186 in the second quarter and $186 for the 2023 average.
ERS estimated total beef production this year at 26.98 billion pounds, which would be 1.3 billion pounds less (-4.6%) than last year. Beef production in 2025 was forecast at 25.17 billion pounds, which would be 1.81 billion pounds less (-6.7%) than this year’s estimate.
Domestic demand remains resilient
Although seasonally lower, wholesale beef prices continue at what some would consider a remarkably high and consistent level with Choice hovering around $300/cwt.
The all-fresh aggregate retail beef price set a record in June at $7.57 per pound, which was 3¢ more than the previous monthly record established in October 2021, according to the Livestock Marketing Information Center (LMIC).
Strong demand and underlying U.S. economic strength are fueling cattle prices even more than snugger cattle supplies and beef production, says Stephen Koontz, agricultural economist at Colorado State University, in the July 31 issue of In the Cattle Markets from the Livestock Marketing Information Center (LMIC).
“At some point in the future, we will need to be concerned about competing meat supplies, trade volumes, the strength of the dollar, and interest rates versus inflation. But this summer the cattle and beef market just continue to show dramatic strength. And this is largely due to the underlying strength in the domestic economy,” according to Koontz.
Wait and see
Despite growing price incentive, national beef cow liquidation continues, and heifer retention has yet to begin, according to the semiannual USDA Cattle report published at the end of July.
There were 29.4 million beef cows in the U.S. July 1, which was 800,000 head fewer (-2.6%) year over year. The number of beef replacement heifers was 100,000 head fewer (-2.4%) at 4.05 million head. This year’s calf crop was estimated to be 33.8 million head, which would be 664,500 head fewer (-1.9%) than the previous year.
The calculated number of cattle outside feedlots July 1 — calves under 500 pounds, other heifers and steers weighing more than 500 pounds — was 34.4 million, which was 1.3 million head fewer (-3.6%) than the same time last year.
Total cattle and calves in the U.S. July 1 of 95.9 million was 2.7 million fewer (-2.7%) than a year earlier.
“Not only did the report show continued cattle liquidation thus far in 2023, but there are also no clear indications that numbers will stabilize and grow anytime soon,” explained Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in late-July market comments. “The current inventory of beef replacement heifers is 4.05 million head, lower than the previous cyclical low of 4.2 million head in 2011 and 2012 and is the lowest in 50 years of available July 1 inventory data.”
In his mid-August weekly market comments, Peel explained herd rebuilding was slower than what occurred following the 2011-13 drought, which shoved cattle numbers to a cyclical low in 2014.
“Continuing drought is still an issue in significant regions of cattle country,” Peel said. “While drought is not likely causing a great deal of additional herd liquidation from a broader market perspective, it surely is preventing herd expansion in those drought-stricken areas.”
Moreover, he explained areas already emerged from drought need two to three years to heal and also to replenish hay supplies.
Similarly, according to Peel, “Many cattle operations have suffered from considerable financial stress from drought and high input costs. The short-run need to realize immediate returns from higher cattle prices may be causing continued heifer and cull cow sales for now.”
Next, Peel cited the uncertainty surrounding input costs.
“Record hay prices and elevated supplemental feed costs have had a huge impact in drought regions. Record or near-record high fertilizer, chemical and fuel costs have been a significant challenge for producers, especially in regions of introduced pastures,” Peel explained. “Though some input prices have moderated in 2023, input price uncertainty has producers reacting cautiously to higher cattle prices.”
Plus, he pointed to significantly higher interest cost and a much slower economy than existed during the previous herd expansion.
Perhaps a less obvious reason for expansion reluctance is producer expectations.
“Until enough cow-calf producers anticipate enough returns for a long enough period of time, herd expansion will be tempered,” Peel said. “In the meantime, cattle supplies will continue to tighten. Market prices for calves and feeder cattle will continue to increase as the market provides more price incentives that will eventually strengthen producer expectations and jump-start herd expansion. That process is likely to begin in earnest in the remainder of 2023 and into 2024.”