Market Outlook
Long-term outlook for cattle, beef market By Stephen Koontz
The local stockyard is not too far from my northern Colorado home, and on calm fall evenings during the right day of the week I can just hear the chorus calling for momma. The fall run of calves makes real the work of spring and summer, is in and of itself rewarding, but is also a time to think about next year and plan for the long-term.
“How big does that cow herd need to be to support the farm and ranch business?” “Do we have the resources to support that herd size?” “What’s it going to cost in people, time and money to feed a beef cow through the winter?” “Which cows – and heifers – should be kept and which sent to town with the rest of the calves?” And any more the rest of the calves are those not sold on the video over the summer.
We do have to live decisions made this fall for the next several years. This write up is one perspective on that longer-term outlook.
The long-term is always anchored to from where we start and domestic beef demand has been nothing short of extraordinary these past two years. Beef production in 2021 was about and in 2022 will be over 28 billion pounds – and wholesale and retail beef prices have been very strong. Further, the strength has persisted.
There is only one thing that can cause that – high prices with record high production – and that is excellent demand by domestic consumers of beef. Now that excellent demand has and has not trickled down the farm and ranch level. Retail margins and packer margins remain elevated.
Disruptions in the economy and the labor market have seriously impacted retail foodservice and grocery. The depth and complexity of supply chain disruptions is hard to appreciate. But all disruptions, in the end, result in increased costs and require higher margins, and historically, retail margins do not retreat.
There is some variation especially within the year, routine increases followed by modest decreases, but the margin required by the retail sector does not decrease substantially for long – even with the presence of low-cost and high-volume retailers.
The root cause of the higher packer margins is that there have been more fed cattle to slaughter and fabricate than there is packing capacity to perform those services in a five-day work week. Packers have had to run and run aggressive on Saturday simply to process the available animals.
Then throw the pandemic on top. In that environment there will have to be the economic incentive for the industry to process such extensive volumes. And in that environment the value of fed cattle will be lower than historical relationships. It is simply supply and demand – and the market functioning.
There has been much interest in increasing the capacity of the meatpacking sector. Large margins will attract investment capital. But new plants not yet in the final stages, or expansions and modernizations that are not started, will not likely be so.
The supply-demand imbalance that has persisted since late-2016 and certainly since 2017 will be much more in-balance in and after 2023. The imbalance will shift back to the packing industry having capacity in excess of animal numbers by 2024 and 2025.
Strong nonetheless and it is doubtful that demand can further improve nor likely remain so strong. Higher interest rates to tamp down inflation is absorbing a portion of the consumer’s budget and the expiration and withdrawal of COVID funds is tightening income.
The changes to consumer per capita disposable personal income through the pandemic are impressive. There are quarters with large declines due to pandemic related slowdowns and quarters with very large increases due to stimulus programs. There are also substantial labor market dynamics – much job changing, education and retraining, demands for remote and in-person work, and revealed mobility.
It is very much not clear to me where the economy will land through 2023-24. Events could have been a lot worse, but it is also clearly not business-as-usual.
There is much concern and discussion about the possibility of a recession – within the United States and worldwide. The strengthening dollar communicates that the U.S. economy is in better shape than other regions around the world. But it also communicates that our interest rates are higher than those for alternative currencies.
Global demand for beef has also remained reasonably strong through the pandemic. The total world demand for beef has been much discussed in the press and the growth potential is indeed substantial.
However, what the world consumes for beef is rather different than with which the domestic consumers associate. The opportunity remains the chance to grow consumption of, from the world’s perspective, very high-end beef.
The run of weaned calves this year appeared to start early. That observation is confirmed by feeder cattle numbers marketed through Oklahoma, Texas and Kansas through the late summer and into the fall. Numbers are greater than for the same period last year. Further, the number of heifers in the feeding system and slaughter mix is elevated.
That, combined with the elevated beef cow slaughter, communicates clearly that beef herd liquidation has been strong in 2022 on top of the elevated slaughter and liquidation in 2021.
This is the biggest event under our noses that will impact the cattle and beef market for some time. It is the hard liquidation of beef cows and the substantial volume of heifers marketed through the meat system. The portion of female beef animals in the on-feed inventory is almost 40%. It is in the high-30’s during liquidation and in the low-30’s during herd building. This statistic has been in the high-30’s since 2018, several years now.
In addition to the large number of heifers on feed is the volume of herd liquidation during 2022 on top of the heavy liquidation in 2021. These two things suggest a beef cow herd that will be down at least 3% as measured in the Jan. 1 inventory report.
This major change is economically reasonable and for many the economically rational thing to do. (The Agriculture and Business Management team in Extension here at Colorado State University have a XLSX Decision Tool named “Buy Hay or Sell Cows” to look at this question. Google it or drop me an email.) The extent of the drought through 2022 in the Southern Plains compounded the liquidation that started in the Northern Plains during 2021.
Corn prices have approached $9/bu in Southern cattle feeding regions, the national price is closer to $7, and the national average price received for all-hay as reported by USDA NASS was $246/T in August. Record high national hay prices. The futures market for corn continues to reflect nervousness about the 2023 crop. The harvest contract is priced about $6.25 and there is almost no-carry across the earlier 2023 contracts.
No-carry is the market’s way of saying “we want it now” and we’re concerned it’ll be more expensive later. A variety of markets are communicating that it is not a sure thing that 2023 will be a normal moisture year. And if that’s the case then the herd liquidation can easily continue into 2023.
But at some point, feeding costs will be reduced and we will at the same time see beef supplies that are much tighter. In that market the demand for heifers will be substantial and the economics will point toward herd building.
The market environment for 2024 and 2025 will look potentially much different than it does today. And not just heifers, all calves will be much more valuable with lower feeding costs.
I have spoken to many producers that sold calves this fall and back into the summer at prices very close to $2 per pound. Imagine if corn wasn’t better than $7, cow-quality hay wasn’t pushing $300, and if there was a little more wheat pasture.
I am doubtful that tighter supplies will push beef prices higher for the consumer. I believe the action will be down in the marketing system. The tighter numbers will result in more competitive margins at the packing level.
I am uncertain what that looks like, but we will see the discipline that packers can maintain to protect their margin and we will also see who the low-cost firm is and who has the low-cost plants. And maybe labor will be easier to secure and keep when the job doesn’t involve so many Saturday shifts.
But the market environment has the potential to be substantially different in two years. The beef processing industry very much needs to replace some of its older capacity and will need to expand capacity to satisfy the export growth potential but the economics to do that over the window of the two-to-five years will not be there.
So, that’s a lot of balls up in the air to keep track of. Demand, the economy and trade are the most uncertain. Feeding costs and pasture look to be at a premium through next year. But we are definitely liquidating the beef cow herd hard and marketing many of the heifers – that has been since 2018. And we will definitely have supplies of fed animals that can be slaughtered and fabricated with the given packer capacity through a five-day work week, without many new plants. That will happen in 2023.
Then the interest in herd building – or rebuilding – will have economics to support it likely into 2024 and 2025. Of course, depending on the feed market. This is a good reason to think about and keep your eye on the perspective for the long-term.
Koontz is a professor in the Department of Agricultural and Resource Economics at Colorado State University.
