Market Outlook
Time for opportunity, optimism and herd rebuildingBy Lance Zimmerman, Rabobank
Declining beef cow slaughter offers the U.S. beef industry hope that five years of herd liquidation is ending. Now, the industry is waiting for the first signs of a cow herd rebuild with anxious optimism.
The U.S. beef cow inventory does not have to drift any lower at this phase of the cattle cycle. With 28.2 million cows to begin 2024, the national herd is stocked for a worst-case scenario as it relates to drought, and profitability has largely returned to the cow-calf segment.
There is a strong possibility that restocking may take as long as the recent selloff. It will take the expectation of consistent returns over several years to kickstart meaningful heifer retention and development among farmers and ranchers.
Even with the potential for a longer buildout, producers can take steps now to build a herd that can profitably navigate this phase of the cattle cycle.
Ready to go, seeking consistencyCattle producers continue to face unprecedented production and price risk, and sustained profitability will be needed to offset those potential pitfalls.
Drought has declined across major cattle producing regions. Rabobank estimates that less than 20% of the U.S. beef cowherd in June dealt with moderate or worse drought conditions (see Figure 1). That is the lowest June number since 2020, and cow slaughter reflects the favorable shift in pasture conditions.
Beef cow slaughter is down 18% (267,000 head) in first half 2024, and dairy cow slaughter is down 17% (231,000 head). With additional declines in cow slaughter expected through year end 2024, this will mark the end of the liquidation phase of the beef cattle cycle.
However, forecasts over the next six to 12 months show uncertainty regarding climate patterns.
El Niño conditions in 2023 delivered better pasture conditions for cattle producers this year, but a transition back to La Niña in third quarter 2024 has left producers wondering if drought concerns will resurface again.
Furthermore, costs remain elevated even as prices for all classes of cattle trend higher. Corn and hay prices remain 20% higher than pre-pandemic levels, fuel prices are 25% higher and interest rates are 80% stronger.
Those concerns are keeping producers cautious about heifer retention.
Heifers as a percentage of total weekly USDA reported feeder cattle and calf sales receipts remain comparable to recent years, above 40% year to date. July 1 heifers on feed totaled 4.48 million head, which is comparable to the five-year average at 4.43 million. And first half 2024 heifer slaughter down 1% (71,000 head) compared to last year.
Without confidence in a longer path to prosperity, we expect U.S. cow-calf producers to remain in a holding pattern longer before retaining and developing significant volumes of heifers on farms and ranches.
Opportunities vs. obstaclesThe trend for calf, feeder cattle or fed cattle prices is likely higher for the next several years – barring a demand setback. While 2024 consumer beef demand continues to exceed expectations, producers need to manage production and price risks as market opportunities unfold.
During the last 12 months, per capita beef supplies have been relatively steady due to elevated carcass weights and larger beef import volumes offsetting cattle slaughter declines. Yet, the USDA all-fresh beef retail price has been 4% higher, even after adjusting for general inflation (see Figure 2).
That translates to a 4% year-over-year increase in consumer beef demand during that time. There is no doubt consumer pressures have increased in recent years, and uncertainty exists regarding inflation, interest rates, unemployment and tariffs going forward. Yet, even a steady demand outlook from recent levels suggests beef and cattle prices have more upside based on anticipated supply declines.
The USDA beef retail price in June averaged $7.99/pound. That’s a new all-time high in the price series, and it won’t be the last. Over the next several years, Rabobank is forecasting a 6-lb. decline in per capita beef supplies as herd restocking intensifies. Even with relatively steady demand, that supply decline supports retail prices above $9.50/lb.
With cattle producers receiving a higher percentage of consumer beef spending during herd rebuilds, that retail beef price translates to 500-lb. steer prices above $450/cwt. and feeder cattle markets above $350 later in the rebuilding phase. The challenge with higher beef and cattle prices is steeper rebuilding costs.
U.S. average bred heifer prices are currently between $2,500 and $3,000 per head according to CattleFax. Those prices are already above the 2014 highs of more than $2,600, and bred heifer prices exceeding $4,000 per head will be common as calf prices advance toward the $400/cwt. mark.
Then, consider the Bank Prime Loan Rate reported by the Federal Reserve Bank. Throughout 2024, it has been at 8.5%. That compares to an average of 3.71% during the 2013 to 2018 herd rebuild.
Cow-calf producers are likely to have more borrowing needs during this rebuild due to higher operating expenses and more costly replacement heifers. With interest rates more than double the previous expansion, interest expenses will be a significantly larger portion of operating expenses than the last herd rebuild too.
Higher prices will offer cattle producers the chance to make exceptional profits on a per cow basis, but buying or developing new replacement females will come with more costs. Producers will need to be mindful of this as new market prices come with additional opportunities and obstacles during this phase of the cattle cycle.
Creating a herd rebuild roadmapUnpredictable climate patterns, supply changes and margin shifts are increasing risks for cattle producers during this rebuild. Yet, an opportunity exists to mitigate these risks through better vertical coordination and technology adoption.
The U.S. beef industry prides itself on a foundation that starts with independent cattle producers and continues with distinct segmentation from grower to finisher to processor. Each segment independently focuses on production efficiency and marketing to ensure economic viability.
That independence is a central part of what keeps many ranchers viable. Yet, the business environment is becoming increasingly complex and challenging. In Rabobank’s view, a more vertically coordinated supply chain will be an important approach to managing this complexity.
Sustainability commitments, government regulation and consumer attitudes toward beef production are increasingly complex. Cattle producers should explore supply chain solutions that allow for collaboration across segments and share the opportunity and burden of shifting market fundamentals and consumer demands more equally among all participants.
Furthermore, the U.S. beef industry has actively adopted new technology throughout production and processing segments for decades. And the industry needs to continue to lead through innovation across the supply chain. Opportunities exist to leverage technology beyond traditional cattle and beef production.
As the previous solution outlines, consumers and food companies are constantly pushing for production practices, market differentiation, and value-added food attributes as distinguishing factors in the meat case.
Technology will serve a valuable role in that work. Beef traceability and smart technology will grow in importance, not simply for animal identification or disease traceability but also to track production claims, improve measurement, identify market inefficiencies, and improve cross-segment communication (see Figure 3).
