Market outlook
Cattle and beef markets in transition: A long-term viewBy Stephen Koontz
Markets revealed to us during the spring of 2023 a major change and a perspective on conditions for the coming years. A new record high fed cattle price is in the books. And market conditions during the past five years have been in a rut. We have had large numbers of cattle on feed and the accompanying large numbers of feeder cattle and calves and large amounts of beef downstream.
That has started to change in 2023 and will be rather different for 2024-26. We haven’t seen the coming market conditions since prior to 2015.
You might need to dust off some of your old business plans. I am certainly looking back through some of my historical bar charts and back to some of my older supply and demand analysis. What were we thinking back when the underlying market fundamentals were so different? And, what’s the cause then and going forward? Let’s keep things long term.
Since 2016, and certainly by the end of 2017, the fed cattle market had larger numbers of animals than the total packing industry slaughter capacity as measured over a five-day work week. This was the case clearly from 2018 through 2022.
What’s the evidence to illustrate this? Count the head total based on plant chain speeds and shifts across the number of plants open over the prior years. Oh, what’s work.
What’s the easy evidence to find to illustrate this? Examine the Saturday USDA Federally Inspected Fed Steer and Heifer slaughter. Saturday slaughter was minimal prior to 2015. By 2018 the Saturday slaughter was persistent and substantial. Large volumes of Saturday slaughter have been the norm for the past five years.
And that would have been the case without the pandemic supply chain disruptions. Those public health events in 2020 delayed slaughter, delayed marketings, delayed placements, pushed feeder cattle back out on grass to slow the throughput. (And I’ve said nothing about the human cost of the pandemic which was substantial and that doesn’t imply it’s not important – just not my skill set.) Because of the flexibility with ruminant beef cattle many adjustments could be done, and the delays were less costly than other protein animal industries but took far longer to play out.
This important underlying market fundamental transitioned in 2023 and did so due to the reduction in the beef cow herd. Cattle prices are record high and cattle on feed numbers are, really, just beginning to turn lower.
There will be substantially reduced numbers over the next one-to-three years. There are fewer beef cows, there will be fewer calves and feeder cattle, fewer animals to feed and fed cattle, and reduced beef supplies. Numbers will be down 1-3% annually for at least the next two years.
And these are changes “baked in the cake” – cow numbers today impact calve supplies this fall and next. Supplies will tighten further once herd rebuilding starts. There is little evidence that beef cattle producers are stopping cow liquidations and holding back heifers – the percentage of heifers in the fed animal slaughter mix remains high although beef cow slaughter began to tail off last fall. Once herd building begins then supplies will tighten further for at least a year.
In the end, the long-term outlook for beef production is very tight, tighter than 2014-15, and the likelihood of a dramatic reduction in market share for beef is certain.
What are the implications for cattle and beef prices? Clearly, the conditions are very bullish. But there is also the need to temper this optimism by recognizing other long-term economic factors. And these other factors have not had much of a role in the past five years.
It is unlikely that farm and ranch-level cattle and wholesale beef prices will simply continue to strengthen. Wholesale and especially retail beef prices are strong – and have been strong since mid-2020. Simply expecting them to muscle higher especially with a slowing economy and double-digit loan interest rates is not reasonable.
Economic fundamentals beyond supplies haven’t mattered much in the consumer beef market following the pandemic. But thinking economics will never matter is unwise.
What is meant by this statement? If you examine the price and quantity combinations – quarterly or annually – since the pandemic began of retail or wholesale beef prices and per capita domestic consumption the strength of demand is substantial. Consumers bought large quantities and paid very high prices. That’s outstanding demand plain and simple. To just assume this will continue or persist seems unlikely.
The pork market has come back to Earth after its bout of excellent demand as have the markets for poultry products. Somewhere in the future the discount of these protein prices to beef will matter for consumers and food service. We are not seeing it yet but there is quite a bit of 2023 and 2024 remaining. So, in the future, I anticipate seeing more substitute meat price impacts influencing the cattle and beef market.
We will also see which packers and which plants have the lowest slaughter and fabrication costs. Prior to the pandemic a reasonable slaughter and fabrication cost for a large and efficient plant was something on the order of $180-$200 per head. Of course, packers made much more than that over the prior five years as they had to be incentivized to run two shifts on Saturday.
For my entire career the main incentive to packers has been to disinvest. The last five years were different in that sense. Post-pandemic the costs are much less stable and well-known, but I understand them to be $275-$300 per head.
With tighter volumes packers will have to be willing to live with smaller margins but they are also not public service utilities. They cannot run for long periods of time without making a return to ownership and management.
The break-even number of shifts per week for a plant historically occurs sometime late on Thursday. So, run through Thursday and don’t make much money or close for the week and lose downstream customers?
Hard choices. It is an easier decision to not run Saturday or not run a second shift Friday. These days are coming. Not immediately but the reality is that it has been a long time since the packing industry has had to make these calls.
And a similar assessment is likely for the retail sectors — grocery stores and food service. Like the packing industry, there were disruptions and large changes in especially labor costs.
There will be an interesting interaction between perceptions that consumers have. Are they less sensitive to high prices because prices have been so high for so long? Or as many things return to more and more normal will they return to shopping for cheaper acceptable choices?
I remember having lunch with a couple of cattlemen in 2014. They noticed, and were rather bothered by the fact, that the chicken sandwich was $5 and change while the burger was almost $20. The consumer does have something to say about retail protein prices and margins. Maybe not during a pandemic and maybe not when the economy was/is throwing all manner of fuel on the fire to reestablish personal and business norms. Those stimulus dollars have been substantially reeled back and interest rates are no longer zero.
Over the past five years for certain, international trade in beef and other proteins has taken on market impacting significant. Low cattle prices and abundant supplies certainly create that opportunity. China has grown from nothing to one of the three largest destinations for U.S. beef.
Trade to China or even exports in general will be challenged in the coming years. Tight supplies and high prices will instead create opportunities for other proteins in terms of exports. And imports of lean beef will very likely be more in the news.
With smaller cow beef supplies, and eventual herd building, the overall supplies lean beef for blending with fed beef trim to produce hamburger will be an issue. Expect this topic to return to the discussion.
Another change that is talked about is the continued progress and standardization of beef-on-dairy animals. I am asked does this new approach have the potential to mitigate the coming tight beef supplies. I don’t believe in meaningful terms. The numbers of bred dairy cows will depend on the economics associated with dairy product markets.
Does domestic consumption remain strong? Very likely yes. And does the international market continue to grow for dairy products? Again, very likely yes.
One of the most impressive commodity market graphics is the volume of dairy products exported since the late 1990s. Prior to 1990, very little dairy was exported. With the opening of international markets to dairy products, the growth is sales from the U.S., and Oceania, has simply and persistently marched higher and then much higher.
The amount of milk and therefore the number of milking cows needed will be determined in this total dairy product market. Those dairy cows will, in the future and if they are not supplying replacement dairy animals, will be bred to beef bulls.
Prior to this cross purpose breeding, these cows would have been bred to a dairy bull and if the progeny were not replacements, then those animals would have been fed for the beef market. The main transition in the future is that we will feed dairy animals that just don’t look like dairy animals. They will look like beef cattle.
A final interesting thing that happened during the pandemic is that it appears to me that a lot of the excess capacity and slack in the economy was removed. It is The Great Retirement, but it is also more than that. And this other dimension is not much talked about.
Ever since the Great Recession of 2008-09 the economy has been stuck in a slow-growth and very low interest rate phase. Risk taking was mitigated and margins were protected. Business was done but there was not much aggressive pursuit of profit.
The slack in the economy in part disappeared during the pandemic and for sure disappeared coming out of the pandemic. Inflation is strong and labor markets are tight. I am not sure you can find a market for intermediate goods and services that is not tight.
Try getting an appointment with a machine mechanic or a contractor to look at property improvements. The ability to do this has improved a lot in 2023 but it is nothing like it was in 2018 or 2012.
This removal of the slack in the economy makes for potential stronger growth, tight labor markets, and the likelihood of higher inflation than we saw in the 2010-2020 period. The goal of 2% inflation seems aggressive given the general tightness in the economy.
If the Fed persists, then any slowdown might be protracted. But I do think there is a bit of a more substantial change in the underlying general economy.
As always, there are a lot of uncertainties ahead. But what is not uncertain is fewer beef cow numbers and tighter animal supplies. This is bullish for price, as it is price that rations tight supplies, but the dynamics of downstream margins are not so simple as to conclude just bullish.
There will be tightening of packer and retail margins, and those industries are seeing higher costs. The next few years will offer the opportunity to illustrate what those costs have become.
Regardless, there will be good profit opportunities for cow-calf producers. And less so, and less business, for downstream market participants.
Those good opportunities for producers will appear with real strength when feed costs and the drought moderates. And as I sit here in Northern Colorado watching the second day of a three-inch rain the long-term walks another day closer.
Koontz is a professor in the Department of Agricultural and Resource Economics at Colorado State University.
