Cattle producer profitability likely to be squeezed in 2018

Tuesday, January 9, 2018

Continued growth in beef production in 2018 is likely to pressure cattle and beef prices, with domestic and international beef demand being critical factors affecting prices.

“Cattle producers have a number of economic conditions to watch that will indicate the impact of factors they cannot control and that will have implications for those factors they do control,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

The U.S. economy is currently strong with low unemployment and a stock market supported by a significant amount of cash from earlier Federal Reserve stimulus.

Economic growth has been plodding but steady over the past few years. Though the inflationary fears of some analysts have not yet materialized, the Federal Reserve began raising interest rates in 2017 as the economy gained strength.

“The recent tax cuts and proposed infrastructure investments could provide additional fiscal stimulus that adds to inflation concerns,” Peel said. “This may pressure the Federal Reserve to raise interest rates more and faster in 2018 and beyond.”

Peel added record beef production is expected to combine with growing pork and poultry production to result in record total meat supplies in 2018. Wholesale and retail beef prices held up well to growing meat production in 2017, indicating strong beef demand. There is no indication it is changing going into 2018.

“Still, ample meat supplies will continue to be a demand challenge for beef in the coming year,” Peel said. “Pork and poultry production and trade are factors to watch this year.”

Beef trade provided good support for cattle and beef markets in 2017, led by growth in beef exports. Most analysts expect modest beef export growth to continue in 2018 assuming no change in trade policy.

“One item of note is the cloud of uncertainty caused by NAFTA renegotiations, which continues to hang over meat markets,” Peel said.

Beef, pork and poultry exports to Mexico and Canada represented 31 percent of total U.S. meat exports and included 26 percent of total beef exports for the first 10 months of 2017.

“Both the United States and South Korea have suggested a possible renegotiation of KORUS-FTA, which could impact America’s number two beef export market,” Peel said. “International beef markets and trade policy likewise are factors to watch in 2018.”

Domestic and international beef demand will determine cattle and beef price pressure relative to increasing beef production. Peel said modest price pressure is expected at this time but any threat to demand would quickly result in additional price weakness.

“Larger downside price risk means risk management takes on an added importance in 2018,” he said. “While cattle producers cannot have much impact on overall market price levels, they may be able to reduce the risk of lower individual prices with risk management tools. Producers likely will have challenges to maintain profitability in 2018.”

Lower prices increase the likelihood of lower revenue and puts additional emphasis on production and cost management in the coming year.

Peel said the beginning of a new year is a good time to evaluate all aspects of cattle operations for the coming year, including major budget items such as forage management and use, harvested and supplemental feed use and machinery costs.

“Overall production costs are expected to remain stable in 2018, though rising interest rates may impact debt management at some point,” he said. “Maintaining profitability this year in the face of lower prices will require increased production and/or reduced costs.”

The bottom line for cattle producers: Profitability likely will be squeezed but decent returns are possible in 2018.

Oklahoma cash receipts for cattle annually exceed $3.7 billion, according to USDA National Agricultural Statistics Service data.