The market’s huge run of late has been driven by frantic action on the wholesale side – surging beef values incentivized packers to chase cattle.
The result of January’s cattle market necessitates resetting the graphs and updating the record books. The market was so good it brought to mind some material from an introductory paragraph I made in this column awhile back following a favorable run.
That discussion centered on the opening scene from “Mary Poppins.” Mr. Banks is arriving home whereupon his neighbor, Admiral Boom, asks him about the world of finance. Banks replies, “Never better. Money’s sound, credit rates are moving up, up, up and the British pound is the envy of the world.”
Within that theme, maybe the beef parallel would go something like, “Fundamentals are solid, markets are moving up, up, up and well-bought feeder cattle are the envy of the industry.” However you might describe it, last month’s column certainly understated the market’s potential to run: “…it appears the business is positioning for another leg up as we go into 2014.”
No doubt, trading cattle at $150/cwt. is an important benchmark. However, just as important is the market’s unprecedented $20 jump in just five weeks, which is nothing short of remarkable. But perhaps most important of all is the fact that it was only four years ago (December 2009) that the market dipped below $80 (Figure 1).
The market’s huge run of late has been driven by frantic action on the wholesale side – surging beef values incentivized packers to chase cattle. The Choice cutout closed Dec. 23 at $196.69. Then, over the course of the next 20 business days, boxed-beef values gained a total of $43 to eventually top out at $240 on Jan. 22. During that run, the market moved higher on all but one day – a mere 10¢ decline on Jan. 2 (Figure 2).
The beef industry’s prosperity has transcended all aspects of the business. That is, higher fed cattle prices have subsequently boosted feeder prices. The CME feeder cattle index jumped above $170 as 2014 opened for business and managed to stay above that level during the entire month of January despite corn prices moving slightly higher.
Therein enters the double-edged sword of better prices. Fast-moving markets to the upside present some challenge to those committed to ownership week-in, week-out. Many conversations with those individuals include some observation about the market and ensuing gratification in selling the highest-priced calves of their life. That discussion, though, immediately flips around with worries about digging back into the market and purchasing replacements at these levels.
While the market news that ushers in 2014 was important, so was USDA’s Cattle Inventory report. The beef cow number came in right at 29 million head, which marks 2013 as the 18th year of liquidation. More than 6 million cows have been removed from the national herd during that time span (Figure 3).
Perhaps more important, though, is some analysis of the estimated heifer inventories. First, some key observations on that front (Figure 4).
- Beef cow replacements were pegged at 5.47 million head – of which 3.32 million head are expected to calve in 2014 (an increase of 38,800 head vs. 2013)
- That leaves 2.15 million head being developed to calve in 2015 (up 51,400 compared to last year).
- The category defined as “other heifers” was estimated to be 8.74 million head. The count is off 461,000 head from 2013.
- In combination, the categories (being developed and other heifers) total 10.89 million head vs. 11.30 million head last year.
Clearly, there’s some optimism (albeit very muted) brewing among producers as total replacement heifer inventory (combined expected to calve and being developed) is at the highest mark in five years. However, keep in mind that liquidation has been a fairly deliberate process through the accelerated dispersal of cows (not slowing heifer retention) resultant from considerations such as weather, finances, and demographics.
Those operations remaining in business, even if they’ve downsized, haven’t substantively changed heifer retention rate over time. It’s remained roughly equivalent to approximately 18% of the beef cow population; in fact, this year’s rate stands at 18.8%. Nonetheless, while the upside difference is relatively small, the trend is important. Clearly, beef producers are signaling some enthusiasm about the future of the beef business and keeping back a greater number of heifers to put back in the beef herd.
However, that interpretation needs to be somewhat guarded, especially in light of the market’s recent developments. That is, the “other heifers” category (primarily stocker cattle) is sharply lower vs. last year. That will create the need to pull feeder cattle from other sources. And until the bulls go out, many heifers “intended” to be replacements (those categorized as being developed) are really in flux; they can be readily sold as feeder heifers any given week. That’s especially true considering the extra enticement the market is now offering producers holding those cattle.
Of course, one could argue that scenario works both ways. That is, some cattle in the “other heifers” category will end up coming back into replacement heifer programs – if the economic incentive is perceived favorably to do so. The bottom line is that the industry is increasingly setting up for a tug-of-war around the heifer segment as total numbers get tighter and cow-calf producers may be on the cusp of eyeing expansion (albeit ever so slightly).
Between the market’s January surge and considerations around current cattle inventory, 2014 could prove to be a very significant year for the beef industry. And if nothing else, the past month reveals just how volatile the market can be. That consideration becomes even more important with continued struggle around tight supply. All that serves as reminder to be ever-watchful, remain fully informed, and maintain objectivity around all aspects of the business.
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