Caution not fear key to managing beef herd expansion

Tuesday, October 11, 2016

The U.S. beef industry’s transition to greater beef supplies in 2016 has been a challenge for many, perhaps in part because younger producers and traders have never before participated in herd expansion, which last occurred in the early 1990s.

“A persistently bearish psychology and almost ridiculous volatility in live and feeder cattle futures recently has contributed to a meltdown in cash markets and a mood among producers that is best described as fear,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

Peel said the fear is leading to a feeling among many that any data with a positive year-over-year change – be it herd inventory, cattle slaughter, beef production, feedlot placements or some other category – is cause for rampant bearishness.

Perhaps a little perspective is in order. Analysts generally believe the beef cow herd is probably still expanding in 2016. There is no way to be certain, of course, since the USDA National Agricultural Statistics Service has not provided any inventory update since January.

“The beef cow herd is expected to grow another 1.5 percent to 2.5 percent in 2016,” Peel said. “Added to the expansion in 2014 and 2015, the Jan. 1, 2017 beef cow herd inventory is likely to be approximately 31 million head.”

That would return the beef cow herd inventory to the level at the beginning of 2011, before drought liquidation dropped the herd by an unplanned 2 million head.

“Although the expansion since 2014 is properly characterized as cyclical expansion, it can also be thought of as drought recovery,” Peel said. “There is little doubt the herd was poised to expand in 2011 in the absence of drought. Thus, it hardly seems likely that expansion getting back to a similar level can be thought of as drastically overshooting the mark.”

What about the sharp rise in carcass weights recently? Steer carcass weights increased 28 pounds from 2013 to 2015, as an example.

“Essentially, it means a lesser degree of expansion will be required to produce the needed total level of beef production,” Peel said. “The need for additional herd expansion in 2017 and 2018 is questionable but the expansion thus far is not too much.”

Most analysts expect beef production to increase 4.5 percent to 5 percent year over year in 2016. This follows a 7.9 percent decrease, and a 22-year low, in beef production from 2013 to 2015. For 2016, beef production is projected to be approximately 24.8 billion pounds. Despite the year-over-year increase, that is still 4.7 percent below the average beef production level from 2009 to 2013.

“Domestic and international demand growth in the next few years will determine what level of beef production is needed but it is obvious the industry is not at that level yet,” Peel said.

Furthermore, current average cattle carcass weights are 15 pounds below what they were this time last year and are expected to remain below year-earlier levels for the balance of 2016.

“Year-over-year cattle slaughter rates for the rest of 2016 will still be higher than last year but should moderate and, combined with lower carcass weights, are expected to hold fourth quarter beef production to less than a 3 percent year-over-year increase compared to the 7.4 percent increase in the third quarter,” Peel said.

Additionally, U.S. beef imports are 12.1 percent less through July and U.S. beef exports are improving, up 3.1 percent through July. Both should help moderate beef supply increases in domestic markets.

“This is expected to hold the 2016 domestic beef consumption increase to under 2 percent year over year,” Peel said.

Fewer cattle are being imported this year from both Mexico and Canada with Mexican feeder cattle imports down approximately 25 percent thus far this year. Peel believes this will help moderate the increase in domestic feeder supplies going into 2017.

“The market shock absorbers are in place and working,” he said. “Cattle and beef markets should move forward with much less drama compared to the past few months.”

In short, while the supply challenges going forward mean that caution on the part of producers and lenders is advised and warranted, the growth in cattle inventories and beef production thus far do not constitute a wreck.

“The key is to be cautious but not fearful,” Peel said. “Producers need to take care that fear doesn’t cripple decision-making to the point where they don’t take advantage of opportunities that inevitably exist in changing market conditions. The beef industry has been through this before, just not in 20 years or so.”

Cattle and calves account for approximately half of agricultural cash receipts in Oklahoma, according to USDA National Agricultural Statistics Service data.