By Augusto Semmelroth | Source: USDA, Steiner, CME
US cattle markets continue to show no signs of cooling down. Underpinning this remarkable price rally is the combination of favourable structural and cyclical factors that converged to create unprecedented upward pressure on prices. This article looks at some of the general factors affecting the US cattle market right now.
The US cattle herd has undergone a steady decline over the last 30 years, with the total numbers dropping from 140 million head in the mid-1970s to 95 million head in July 2014. This equates to a 32% reduction in cattle inventories (figure 1).
Despite the ongoing contraction in herd size, major productivity gains (i.e. genetics, animal nutrition) seen since the early 1980s have allowed the US beef industry to continue increasing throughput until 2002. Between 1979 and 2002, US beef output grew by 27% to 27.1 billion pounds. Yet, since then, any further gains in productivity have been largely offset by the continual decline in the cattle herd (figure 1).
The reduction in US cattle inventories has become very evident over the last eight years particularly given the strong liquidation of breeding stock. That process was further exacerbated during 2010-12 as a result of poor seasonal conditions, expensive feed grain prices and poor cow/calf operation margins (figure 2).
Now that situation has changed completely. Improved rainfall conditions since 2013 have seen fodder and grain production move to record levels for two consecutive years. As a result, the price of key components of cattle diets, such as corn and soybeans, are now 50-60% lower than the peak seen in mid-2012.
This has enabled cow/calf producers to halt cow and heifer turnoff in order to rebuild their breeding herds while allowing lot feeders to bid higher for feeder cattle. As demand for feeders outstrips supply, feeder cattle prices have embarked on an unprecedented uptrend since April 2013. In our terms, feeder cattle markets have moved from around 300¢/kg lwt to 586¢/kg lwt last week, virtually doubling in prices.
If the improved seasonal conditions were the trigger for female retention, the ongoing rally in feeder prices, and the surge in cow/calf producer margins were the spark/catalyst to hasten that process. Over the last 12 months, cow slaughter has plunged 10-20% below year ago levels to create a strong beef supply deficit and prompt an outstanding rise in beef and finished cattle prices (figure 3).
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From a structural point of view, the US cattle market is now at its smallest size on record. This leaves the US unable to ramp up production in a timely manner to cope with a sustained recovery in demand.
From a cyclical point of view, abundant and cheap feed supplies have created a very favourable environment for a new herd rebuild phase. In the short to medium term (1-2 years), this means tight beef supplies caused by reduced cow slaughter and a chronic shortage of store cattle to meet lot feeder demand.
This US story sheds some light on what we should expect once the season turns here. We have experienced a similar structural liquidation of the herd over the last two years, so the impetus to follow a comparable rebuild path will be there. This trend will be reinforced by the very positive export demand outlook and a lower A$, which will enhance our export competitiveness.
The price transfer from high beef prices to domestic cattle markets could occur very abruptly once our supplies dry out. As with the US, store cattle markets will be the ones that benefit the most when that happens, particularly given the fact they remain depressed at the moment.
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