Market Outlook
Cattle and beef markets long-run knowns and unknownsBy Stephen Koontz
Let’s talk about the cattle and beef market outlook and let’s do it from a more long-run perspective. There are some fairly solid knowns that have shaped up and will have particular implications for the future. These knowns are mainly supply related. But strategic thinking also requires recognizing contingencies, things that might happen, and preparing plans of action for different alternatives. There is a need to recognize possible unknowns and my assessment is that they are also more likely to be demand related. Both are important for implementing risk management and marketing plans so let’s weave some of that into the end of the discussion.
The clearest known is the shrinking beef cow herd and implications for smaller future supplies of calves, feeder cattle, fed cattle, and beef. And of course, this process takes close to two years to play out – from the cow decision to the resulting beef supplies. Forecasts of beef production for 2024 and 2025 are for commercial slaughter to be down 6.6% and 5.5%. Increases in carcass weights – as the second quarter of 2024 sure revealed – will offset a portion of this decrease. Forecasts of average dressed weights from commercial slaughter suggest increases of 2.2% and 1.0% for 2024 and 2025.
Commercial beef production will therefore be down 4.5% for 2024 and 4.6% for 2025. (You can find different forecasts across your favorite market analysts and the USDA, but I am using those from the Livestock Marketing Information Center in Lakewood, Colorado – of which Colorado State University is a member.) Regardless of the source, the consensus is that beef supplies will be tighter in the future.
The shrinking beef cow herd has largely been driven by drought conditions in southern great plains over the prior five years. It has also been impacted by longer term profitability, aging operators and enterprises, and drought conditions rotating through other regions in which cow-calf operations contribute materially to supplies. Examples of the latter include the mountain west, northern plains and central southeast U.S. Cow-calf producers make overall herd size decisions based on resources, profits, and their time.
But there is also the annual decision to replace or not animals impacted by culling decisions. Some portion of the cow herd is culled every year and the question is, to what extent are these animals replaced? Effectively half of the calf crop are female animals, a portion of these animals are used as cull replacements, and the remainder enter the meat production system. During liquidation phase of the cattle cycle more females – mature and young – enter the meat system. And during the rebuilding phase of the cycle far fewer females enter the meat system. For at least the past five years we have clearly been in a liquidation phase. There are more animals and a relatively high portion of animals slaughtered for meat are female. Rebuilding will – rather substantially – change this.
Rebuilding is a known that is coming. It will impact the market in the future. But it is not here yet. There is much focus on pasture conditions especially in the southern plains and there is much focus on the weekly Federally Inspected beef cow slaughter numbers. Is the cow slaughter slowing down and some evidence of expansion coming? Is there enough forage? Not yet. (The main slowing is on the dairy side.) But clearly substantial profitability has returned to cow-calf enterprises. And when expansion does happen then there will further tightening of beef production.
Currently, beef supplies are tightening due to reduced overall beef cow herd numbers. Far more dramatic is on the horizon. I repeatedly hear people – often market watchers – talk about how the cattle cycle isn’t relevant or isn’t important. I think these folks likely don’t have the patience to think through how long the two phases of the cattle cycle last. The whole cycle is 10-12 years and in that window changes direction only twice. The two phases – liquidation and expansion – take multiple years to play out. In the end, it is actually the main thing going on.
Now does all this point to simply higher and higher with continued record setting prices? If you only focus on the supply information then yes. But I have serious concerns. And there is not simply one story. I believe yes for calves and breeding stock, less so for feeder and fed cattle, and much less so for beef. Calves and breeding stock will be tight and much sought after. And feeder cattle will be similar but not as aggressive. Fed cattle less so as margins further downstream become compressed. This will be more and more the important story moving forward – at some point in time – as supplies tighten then margin enterprises will have difficulty securing enough volume to cover costs.
All costs in the system and especially further downstream are not variable. Fixed costs become more important downstream and are harder and harder to cover and supplies tighten. This is one problem with simply forecasting prices will move higher. The supply situation suggests it but there is insufficient volume to cover all costs and especially in downstream firms then that’s not the case.
Regardless, during the third and fourth quarters of 2024 and 2025 the calf market is set up to trade over $3 per pound, feeder cattle will likely be above $2.50 per pound, and fed cattle will make runs at $2 per pound. The first is more certain than the latter.
But what about these beef prices? 2022 saw record large beef production and almost record high beef prices. How is that possible? Demand is the only answer. The economy was strong enough to support consumers willing to pay record high beef prices and consume the record large volume. I don’t think it’s a good idea to just expect more and more of that – nor forecast it. Any softening of beef prices will hold down fed cattle prices and feeder cattle prices. The businesses that secure the cattle will be the ones willing to operate with thinner margins. But the key is demand at the retail and wholesale levels. For what price can retailers sell beef and for what price can packers sell what they produce? The supply side is clear. The demand side for the next several years – much less so. Let’s detail some of that.
On to these less discussed unknowns. There is much lamenting about inflation, but we came through a worldwide pandemic reasonably unscathed. Not all of us and not every family for certain. Insurance research points to about a million excess deaths in the U.S. But a lot of the close to worst-case scenarios anticipated did not come to fruition. Likewise, the economic fallout. Economic downturns were very sharp and very brief by recession standards. Fiscal and monetary stimulus was very successful. And from an economic perspective, I believe that interest rates and inflation from 2009 to 2022 will be the anomaly.
The pandemic absorbed the excess supplies of capital and labor and other excess capacities that had persisted. Where is this going? That stimulus was very very good for beef prices. And the impacts are unlikely to continue. Fiscal stimulus has almost run out. This takes a lot longer than you might think. One person’s expenses are another person’s income and the multiplier effect here takes years. But monetary stimulus has turned to contraction. How much money do you now have sitting in your money market compared to three years ago? I believe that all this stimulus had a huge income effect on beef demand from 2020 into 2023 and we will not be able to count on it in 2025 for sure.
We also haven’t worried much about competing meats in the past five years. This will change and will likely become a bigger issue when the beef cow herd expansion is earnest. Part of the cause of the cow liquidation for the past years has been drought conditions and lack of forage. Let’s not forget these drought conditions also impacted feedgrain supplies. Corn prices were above $6 per bushel prior to last October.
Feedgrain prices are now much more manageable for pork and poultry producers. For the three years prior to last year hog margins, broiler margins – and even dairy margins – can only be described as terrible, horrible and awful. You think it’s bad putting $7 corn into a fed steer? Try making the economics work putting it into a hog. There were some good product prices received in those periods but not like there was for beef. Margins have been an issue for several years. But much less so now. Feed costs have retreated and margins have recovered. And that is likely to remain the case for the current year – we will have to see what the feedgrain market does through the summer – there will be very strong feed demands recovering from the past five years because of the lower prices but lower prices nonetheless. And these feedgrain prices which we have not seen for several years will at some point elicit expansions in pork and poultry production. And right when beef supplies are the tightest.
Since I mentioned dairy margins, the next question asked usually has to do with beef-on-dairy and what’s the beef market impact? I believe it is relatively marginal in the end. Every dairy cow that has ever been milked has produced a calf. In the past, we have fed and consumed those calves as finished animals. Today, those animals mainly look much more like a beef animal. And need to be managed properly. So, there may be differences in feed consumption, time on feed, and end weights. But little impact on the overall beef market.
While we will be seeing sharp drop in beef production, and especially when the rebuilding begins, we will actually see smaller drops in domestic consumption. Consumption is forecast to be down 1.7% in 2024 and down 3.9% in 2025. How is consumption of fresh product less than production? Consumption incorporates net beef product trade. The lower beef availability that is reflected in higher prices will result in lower exports and higher imports.
The U.S. is likely to be a net beef importer for the next several years and especially with respect to non-fed beef that is used in ground beef production. This will simply be the case. The trade wildcard will be highly pathogenic avian influenza. Does the persistence result in trade restrictions that limit exports of U.S. beef? The selloffs of cattle futures in 2024 can be linked to this concern. This risk mitigating behavior will also likely simply be the case going forward.
Finally, my least/most favorite topic: packer margins. Packer margins were unrecognizable during the pandemic and have since returned to Earth. Gross margins have not been much over $400 per head in the past 2-3 years. Slaughter and fabrication costs are reasonably in the $300-$400 per head range. So, packers are losing money on every animal slaughtered in that window.
How long can this continue? (I know most cattlemen don’t care and chuckle at the fact.) But this cannot persist in capitalist economies. Poor packer margins place the boxed beef composite value front and center. At some point in time, beef prices will need to increase or fed cattle prices will need to decrease – or some combination of both. Current fed cattle prices cannot be justified with current beef prices. Expect change or expected fewer operating packing facilities – or both. Tighter supplies also suggest tight and negative packer margins will be an important long-term issue.
So, in the end, what do we do regarding risk management? I believe based on my discussed justifications, that there will be strong prices but that there is also and at the same time considerable downside risk. In fact, most of the risk looks to be downside. Prices for calves and cattle are strong. Give a look at the December 2024 Live Cattle contract and at the November 2024 Feeder Cattle contract. The supply side overwhelming justifies the strong prices. But the potential for multiple and/or repeated price breaks are also strong – again give a look at the two contracts. There are a number of demand issues that are largely downside. In this environment one can make a strong case of purchasing put options or aggressive use of Livestock Revenue Protection policies. And don’t just rely on the known supply situation.
Koontz is a professor in the Department of Agricultural and Resource Economics at Colorado State University.