2016 Outlook: Expect Lower Cattle Prices and Modest Profits

For what it is worth. — jtl, 419

By Greg Henderson at Beef Today

2016 Outlook: Expect Lower Cattle Prices and Modest Profits
Your calves will likely fetch fewer dollars next year, but most ranchers should still find 2016 a profitable year.
© Wyatt Bechtel

A Handbook for Ranch ManagersEditor’s note: This is one of 10 marketing outlooks for 2016 that the AgWeb editors are providing to help you succeed and be profitable in the coming year. Please check back each Monday and Thursday for another outlook.

 Planned Grazing: A Study Guide and Reference Manual While calf producers are closing the books on the second most profitable year in history, livestock analysts say to expect lower prices for your calves next year. Lower, yes, but calf and yearling prices in 2016 will still offer good profits for most ranchers.

Environmental & Natural Resource Economics: The Austrian View“We’re at cyclically lower cattle prices, probably at least through 2018, and maybe through 2019,” says Jim Robb, Livestock Marketing Information Center agricultural economist, Denver, Colo. But as the environment shifts away from what calf producers experienced during the post-drought period of escalating prices in recent years, Robb says producers can expect a return to “more normal” seasonal price patterns.

An End to Volatility?

Combat Shooter's Handbook Reconnaissance Marine MCI 03.32f: Marine Corps Institute The Betrayed: On Warriors, Cowboys and Other MisfitsExpected lower prices are the result of a longer-term supply outlook for larger U.S. beef production, but livestock analysts expect U.S. imports of beef will moderate significantly in 2016 as Australian output appears unsustainable.

The Essence of Liberty: Volume I: Liberty and History: The Rise and Fall of the Noble Experiment with Constitutionally Limited Government (Liberty and ... Limited Government) (Volume 1)  The Essence of Liberty: Volume II: The Economics of Liberty (Volume 2) The Essence of Liberty: Volume III: A Universal Philosophy of Political Economy (Liberty: A Universal Political Ethic) (Volume 3)Any projection for cattle and beef production, however, hinges on weather and how it will affect grain and forage production. The drought of 2011 and 2012 forced liquidation of America’s cattle herd to 60-year lows, which, in turn, produced all-time cattle price highs in 2014. Projections for 2016 cattle prices assume normal growing conditions on a national basis.

Cattle prices peaked in November 2014, with 400-lb. to 500-lb. steers topping $316 per cwt., according to USDA Market News, or more than $1,400 per head for newly weaned calves. Remarkably, the November 2014 price was more than 50% higher than in 2013.

Robb, however, calls that market an “anomaly,” and he and other livestock economists believe ranchers should build their expectations going forward on the fundamentals of supply and demand, which continue to show positive signs for beef.

Normal seasonal patterns, if they play out in 2016, would represent a welcome relief from the extreme volatility markets displayed during recent weeks. Newly weaned calves sold for roughly 25% less in November 2015 than they had a year earlier, about $1,035 per head.  Much of that decline was tied to heavy losses by cattle feeders.

Focus on Feedlot Margins

“Feedlots struggled throughout much of 2015, in large part because of the high prices they paid for feeder cattle,” says John Nalivka, president of Sterling Marketing, Vale, Ore. Weekly feedlot closeout calculations by Sterling Marketing suggest cattle feeders lost in excess of $500 per head on steers marketed in November and December, 2015.

“The price of feeder steers accounted for 80% of the total cost of producing a fed steer this fall,” Nalivka says. “Two years ago feeder steers only represented about 65% to 68% of the total cost. So, even with lower grain and feed prices, the cost of feeding a steer to finish weight increased significantly while the price of fed cattle was roughly 22% lower.”

Excessive feedyard losses provides a primary factor livestock economists use to project calf and feeder cattle prices for 2016. As most cattle left feedyards in 2015 carrying a significant loss, it’s only logical to expect feedyards will seek to lower bids on feeder cattle and calves.

Poor feedyard margins suggest “demand for feeder cattle will decline, putting downward pressure on feeder cattle prices,” says Kansas State University livestock economist Glynn Tonsor, and he doesn’t see much relief in early 2016.

“It will be a particularly rough ride (for cattle feeders) during the first six months of 2016. The best month I’m projecting is closeouts in May 2016 with losses of $45 per head.” Tonsor says that’s well within the margin for error in calculated breakevens as there are no assumptions for risk management.

“However, the reason for that projected improvement is because there is not much change in the projected fed cattle price between November closeouts and May closeouts,” he said. The improvement in feedlot margins is from “the projected change in the cost of the feeder steer.”

Outlook for Ranchers Still Bright

Despite the woes of the cattle feeding industry, the outlook for ranchers and calf producers remains positive, at least through 2016. That assessment is based on calf supplies as indicated from the U.S. cattle inventory and how it will expand over the next few years.

America’s historic drought cut the beef cow herd from nearly 32 million head in 2010 to 29 million at the beginning of 2014, the smallest cow herd since 1952. That triggered the price rally that peaked in the fall of 2014, and, coupled with abundant moisture, the subsequent expansion phase. By January 2015 cattlemen had added 600,000 cows to America’s herd, totaling 29.7 million head.

“Going forward into 2016,” Tonsor says, “I anticipate the calf crop will slowly begin to expand such that the tight supply aspect of the past several years lessens.”

Nalivka projects USDA’s cattle inventory report – to be released in late January – to reveal a 2.5% to 3% increase in total inventory and a 2% increase in the nation’s cow herd. He expects 2017 will produce another 2% increase in the beef cow inventory.

While the expansion phase of the cattle cycle means peak prices are a distant memory, Nalivka says there are positive lingering effects of the liquidation phase.

“We have a younger, more efficient cow herd today,” he says. “We have a better cow herd from both an age and a genetics perspective.”

Even the best calves, however, will put fewer dollars in your pocket this year. Yet, Nalivka projects 2016 cow-calf profits to average $295 per cow. That would represent a 40% decline from the average profits of $495 per cow in 2015, but still the third-highest annual per-cow profit in the Sterling Marketing database.

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Planned Grazing: A Study Guide and Reference ManualPlanned Grazing: A Study Guide and Reference Manual. This is the ideal squeal to A Handbook for Ranch Managers.  Although the ecological principles remain the same, what was originally known as “The Savory Grazing Method” now answers to a multitude of different names: ranching for profit, holistic management, managed grazing, mob grazing, management intensive grazing, etc. Land & Livestock International, Inc. uses “Restoration Grazing” under its “Managing the Ranch as a Business” program.” No mater what you call it, this summary and synopsis will guide you step by step through the process and teach you how to use it as it was originally intended. No more excuses for failing to complete your grazing plans.

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About Land & Livestock Interntional, Inc.

Land and Livestock International, Inc. is a leading agribusiness management firm providing a complete line of services to the range livestock industry. We believe that private property is the foundation of America. Private property and free markets go hand in hand—without property there is no freedom. We also believe that free markets, not government intervention, hold the key to natural resource conservation and environmental preservation. No government bureaucrat can (or will) understand and treat the land with as much respect as its owner. The bureaucrat simply does not have the same motives as does the owner of a capital interest in the property. Our specialty is the working livestock ranch simply because there are so many very good reasons for owning such a property. We provide educational, management and consulting services with a focus on ecologically and financially sustainable land management that will enhance natural processes (water and mineral cycles, energy flow and community dynamics) while enhancing profits and steadily building wealth.
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