Analysis & Comments. Cattle Prices: Situation and Outlook. Livestock Marketing Information Center State Extension Services in Cooperation with USDA

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1 Analysis & Comments Livestock Marketing Information Center State Extension Services in Cooperation with USDA January 16, 2015 Letter #1 Cattle Prices: Situation and Outlook A near perfect set of both demand and supply circumstances came together during 2014 creating record high cattle prices. Beef supplies were tight as expected -- U.S. commercial cattle slaughter in 2014 declined just over 7% from 2013 s. Even with heavier average carcass weights, beef production dropped 5.7% year-over-year. Beef demand, both domestically and internationally, for U.S. products was the positive surprise. Beginning in the second quarter of the calendar year, domestic consumer demand exceeded all expectations. On the international side, export tonnage of beef was rather strong and the value of all exported products (meat, variety meats, etc.) set a new high. Compared to expectations in 2013, output of the pork and chicken sectors during 2014 was not nearly as large as anticipated. Hog slaughter was constrained by Porcine Epidemic Diarrhea virus (PEDv). PEDv raised wholesale pork prices dramatically in early Chicken production increased, but at a slower pace than normal as the growth in breeding bird supply flocks was limited by genetic problems and production constraints. Cattle feeders made money in In fact, estimates put their returns at the highest since Feedstuff costs ratcheted down during most of the year as a record large U.S. corn crop was produced. Those lower costs combined with strengthening fed cattle prices turned cattle feeders into aggressive buyers of the cyclically small feeder cattle supply. Two factors provided some mitigation of tight U.S. feeder cattle supplies and by late 2014 pulled the number of cattle on-feed in U.S. feedlots, with 1000 head and larger capacity, slightly above a year earlier. In order of importance, those factors were: 1) increased imports of feeder cattle from Canada and Mexico; and 2) movement of dairy steer calves from the veal industry into the beef production system. Year-over-year gains in cattle prices were dramatic. For the year, fed cattle prices averaged 23% over 2013 s, reaching over $ per cwt. for the first time ever. The 5-market annual average (average of monthly prices for all live slaughter steers) was $ In the Southern Plains, year-overyear increases in calf and yearling prices were even more dramatic calves were up 43% and yearling steers 38%. In terms of dollars per cwt., that was an annual increase of about $74.00 for calves (500- to 600-pound steer) and $57.00 for yearlings (700-to 800-pound steer). Annual average cattle prices for all classes of animals (feds, calves, yearlings, culls, and breeding stock) will probably still increase in 2015 compared to 2014, but in the fourth quarter of 2015 prices are forecast to post year-on-year declines. Those fourth quarter (fall weaning) calf price declines will not be huge and cow-calf operations should remain very profitable. Of course, there are still several unknowns for late 2015 such as corn prices. Also, there will be more competition at the meat case from pork and chicken. Going ahead to 2016, on a quarterly basis, cattle prices may erode throughout the year compared to 2015 s.

2 Page 2 Strong Beef Demand Profile: Domestic and Foreign After a difficult first quarter, the U.S. economy roared ahead for the balance of the year. The U.S. finally put the extended post-recession period (beginning in the summer of 2009) of disappointing economic growth in the rear view mirror. Both the second and third quarters of 2014 posted annual GDP gains of well over 4%. In late December, the annual GDP growth rate for the third quarter was revised up to 5%, the fastest since Robust economic growth was the major factor causing U.S. consumer beef demand to improve in the face of increasing beef prices. In contrast to the domestic economy, economic conditions in many overseas markets deteriorated during Still, export tonnage held-up remarkably well even though U.S. wholesale beef prices were record high. As the year progressed however, exchange rates began to work against U.S. exports. Digging Into Domestic Consumer Demand Discussion of this topic often centers on per capita consumption, but consumption is not demand. Per capita consumption can decrease while beef demand is increasing. In fact, that combination has occurred annually in the U.S. since Using the estimates incorporating per capita consumption, inflation adjusted retail beef price, along with a few economic assumptions, a long-term measure of beef demand change can be calculated. One way to summarize these changes is to develop an index. If U.S. consumer demand appears to be shifting positively the index value increases. The concept of the beef demand index refers to mapping out changes, or shifts, in demand over time relative to a base year (i.e. 1990=100). One way to understand the index is to note that creating it involves calculating the inflation adjusted beef price which we would expect to observe if beef demand was consistent with that experienced in the base year. This expected relative real beef price is compared to the price that actually transpired to indicate changes. The Choice Retail Beef and All Fresh Beef Demand (AFBD) Indices for the third quarter of 2014 each rose by 9% year-over-year. That demand increase was significant, and incorporates per capita beef consumption declining by 4% and real beef prices increasing by 14% compared to the third quarter of The above description provides one of multiple historic examples of how beef demand can improve when per capita consumption declines, highlighting critical concepts. While consumers are being offered less beef currently, largely reflecting production reductions, there is nothing forcing consumers to pay 14% more for beef and the fact they voluntarily do so is a very positive thing for all industry stakeholders. Beef is not the only red meat experiencing positive demand shifts. In the third quarter of 2014, the pork demand index rose by 7% compared to 2013 s. That increase included a 10% price increase compared to year ago levels, and a per capita pork consumption decrease of 1% compared to In the third quarter of 2014, the beef demand index was the highest it has been since 2005 and pork was the best since These were dramatic improvements and may have been a little beyond the gain associated with the improving economy, that is, it may also reflect some improvement in consumer preferences for red meats. U.S. Beef Exports Remained Solid, Imports Increase On a tonnage basis, LMIC projects U.S. beef exports in calendar year 2014 were nearly unchanged from 2013 s. As in recent years, that tonnage was about 7% below 2011 s record. However, due to record high wholesale beef prices the projected total dollar value of beef industry products (meat, variety neat, hides, etc.) was higher than any year prior. The dollar value of beef sector exports (meat, variety meats, etc.) set a new high. Through November U.S. beef exports are valued at a total of $6.5 billion, an increase of 15% or almost $1 billion compared to January through November of Beef exports to Japan and South Korea remained strong throughout 2014.

3 LMIC Page 3 The U.S. attracted more beef imports due to the strong dollar and economic growth rates. Additionally, U.S. beef imports were supported by on-going drought in Australia, which continued cowherd liquidations in that country. In October, the U.S. imported more beef than in any one month since July 2007; tonnage from Australia was more than double 2013 s level. November beef imports recorded the third largest volume of The only major country that sells beef to the U.S. that posted a year-on-year drop in export quantity was Brazil, which has redirected some of their product to Russia. Annual beef imports will be the largest since 2007 and jumped 39% above 2013 s. Dairy Sector and Imports Mitigate Tighter Feeder Cattle Supplies in 2014 In 2014, economic forces were at work pulling more cattle into feedlots to supplement tight U.S. cattle supplies. U.S. dairy calves were pulled away from the veal industry and more Mexican and Canadian feeder cattle came into the U.S. Those factors in part mitigated the impacts of smaller U.S. calf crops in recent years and by late 2014 contributed to pushing the number of cattle on-feed in U.S. feedlots, with 1000 head and larger capacity, slightly above a year earlier. The magnitude of the year-onyear changes posted in 2014 for both those factors, calves from the veal sector and feeders from Mexico and Canada, will probably not be repeated in the next few years. Dairy Calf Changes The U.S. veal industry has been on the downtrend for decades, in 2014 the rate of decline accelerated. Essentially all U.S. veal production comes from dairy industry calves, but demand for dairy calves by the veal industry has dropped and simultaneously demand for those animals by the beef industry has increased dramatically. For 2014 LMIC projects Federally Inspected calf slaughter to reach 557,000 head, which will be 194,000 head below a year earlier. That will be the largest annual drop in calf slaughter since Additionally, the national dairy cow herd has been increasing. Both of these facts demonstrate the increase of dairy calf placements into feedlots instead of going into the veal sector. Typically, dairy steer calves are placed into feedlots at very light weights (e.g. 315 to 340 pounds) and are on-feed for essentially 12 months In terms of dairy calves placed into feedlots during 2014, the key quarters of the calendar year were the second and third. In the second quarter, the U.S. dairy herd was million head, up 20,000 head from 2013 s, and the year-over-year gain for the third quarter was 47,000 head. LMIC calculates that about 210,000 additional head of dairy steers were placed into U.S. feedlots in 2014 compared to Using that number (210,000 head), if the described transition did not happen, the cattle on-feed in the 1000 head and larger capacity feedlots would have been down 0.5% as of December 1, 2014 instead of being up 1.4% year-over-year as was recorded. The general trend of a shrinking veal industry and the U.S. dairy herd providing more calves to the beef industry is not likely to reverse. In the fourth quarter of 2014, the U.S. dairy cowherd is projected to be 79,000 head above that same quarter in 2013 and those animals should mostly provide calves that enter feedlots during the first few months of Still, overall in 2015 the year-on-year changes are forecast to moderate. Milk prices are forecast to erode to levels that truncate herd growth and by the second half of 2015, the number of dairy cows in the U.S. could decline slightly (less than 1%). Preliminary LMIC forecasts are for an additional 125 to 135 thousand head of dairy calves to enter feedlots in calendar year 2015 and the year-on-year change in 2016 could be another 50,000 head. Preliminary estimates for the three-year period from 2014 through 2016 are for about 400,000 head more dairy steers in U.S. feedlots compared to 2013 s. Of course those numbers depend on if the profitability of feeding dairy calves for beef continues to be more appealing than processed into veal

4 Page 4 items. The dairy cowherd is becoming more-and-more a component of the fed beef system and has compensated for some of the decline in beef cowherd numbers during recent years. Cattle Imports Up in 2104 In 2014, high U.S. calf prices and changes in exchange rates (higher value of the U.S. dollar relative to the peso and Canadian dollar) pulled feeder cattle into the U.S. from Canada and Mexico. This helped mitigate tight supplies of U.S. born feeder cattle. Additionally, year-over-year analysis of imports from Mexico and Canada indicate a proportionately larger increase in the number of heifers, compared to steers, coming into the U.S. from both countries. From January through November of 2014, total feeder cattle imports into the U.S. totaled over 1.4 million head, up 23% (265,000 head) compared to 2013 s. Percentage increases were largest for U.S. imports from Canada (up 49%), while that percentage increase from Mexico was a much more modest 13%. Still, Mexico is the largest source of feeder cattle imports representing about 67% in Price Drivers and Outlook: 2015 and 2016 The next two years will not be a repeat of 2014 s dramatic price run-up. Still, cattle prices will likely remain very high by historical standards. Importantly, expected cattle prices suggest cow-calf operations will be very profitable for several more years. Some key price drivers are outlined below. U.S. Cattle Inventory, Slaughter and Production Trends All signs point to this past summer being the transition point toward U.S. beef cowherd growth. Those signs include relationships of heifer and cow slaughter compared to inventory levels and record high cow-calf returns on a per cow basis in Those returns will support rather aggressive cowherd restocking in states that were devastated by drought in recent years and modest herd growth nationwide. As early as the next USDA annual (January 1) cattle and calf inventory count, to be released January 31, 2015, expectations are for the first year-over-year gain in inventory numbers since However, if it occurs, the increase will be slight. Even with the foundation set for breeding herd growth, biological lags prevent immediate year-over-year increases in cattle slaughter. LMIC forecasts that cattle slaughter in 2015 will drop by 1% to 4% compared to 2014 s. Average dressed carcass weights should continue their long-term upward trend, resulting in a beef production decline of about 1%. Preliminary forecasts indicate that year-on-year drops in U.S. cattle slaughter may essentially end by 2016; by then beef tonnage could easily post a small year-over-year increase. Still, 2016 s annual U.S. beef output is forecast to be about 24.3 billion pounds, nearly 1 billion pounds below 2013 s. In 2015, significant year-over-year increases in imports of Canadian and Mexican cattle may not continue, though high U.S. prices will continue to attract cattle from those countries. In July of 2014, Canada reported a 1% decrease in all cattle inventory, a 1% decrease in beef cow inventory, and a 4% decrease in in beef replacement heifer inventory. Data on the Mexican cattle industry is scarce but the data that does exist is consistent with anecdotal indications that Mexican cattle numbers have tightened considerably in recent years. A significant proportion of the increase in U.S. imports from both Canada and Mexico were heifers, according to USDA reports. All signs point to an eroding Canadian and a dramatically shrinking Mexican cowherd. Corn and Feedstuffs, Always a Question U.S. corn production in 2014 surged to a new record of 14.4 billion bushels. Looking ahead, acreage planted is expected to decline some in 2015 as farmers respond to lower corn prices. Nationally,

5 LMIC Page 5 a new record corn yield was established in 2014, for the first time reaching over 170 bushels per acre. The general outlook is that most of the decline in corn prices happened in 2014 and feedstuff costs may be stable to slightly higher going into the future. The bottom line is, cattle feeders are not likely to face lower corn costs (e.g. the drop of $2.50 per bushel between early 2013 and 12 months later), supporting their ability to bid-up feeder cattle prices. Of course, if significantly higher feedstuff costs do materialize, that will tend to put downward pressure on calf and yearling prices. Beef Trade: Exports and Imports Several of the economic forces that pulled beef into the U.S. during 2014 will likely continue for the next few years; specifically stronger U.S. economic growth compared to most other countries, a tight U.S. cattle supply, and a strong U.S. dollar. Exports and imports are major unknowns for calendar year 2015 across all agricultural commodities and trade flows could change quickly given the specter of global recession, geopolitical uncertainty, and abrupt changes regarding exchange rates. On a quarterly basis, U.S. beef export tonnage is expected to post modest year-on-year declines throughout In contrast to exports, the rather large levels of U.S. beef imports could moderate as 2015 progresses. U.S. beef imports are currently forecast to post modest year-over-year increases in the first half of That could change in the second half of the year if, as expected, the cumulative impact of their multi-year drought limits their export tonnage. Competing Meats Ramp-Up in U.S. Production Headwinds in the wholesale beef market from increasing pork and chicken production and hence low prices of those products were overestimated for PEDv remains a factor in the hog complex, but is apparently much more under control than a year ago. Further, the U.S. sow herd has been growing in recent quarters as producers responded to record profitability. In the U.S. broiler industry, hatchery supply flock constraints are being removed, and by late 2014 weekly production had finally reached levels that were expected much earlier in the year. LMIC currently forecasts that U.S. pork production will rise 2% to 4% in 2015 compared to 2014 and eclipse the record level set in Most of the year-over-year gains are forecast to be in the second half of the calendar year. More production is forecast for 2016 (preliminary forecasts are for an annual gain of 3% to 4%). LMIC forecasts chicken output in 2015 will increase faster than pork. The broiler industry appears to be positioned to increase production fully 4% in 2015 and keep growing in The increased production for both meats will create headwinds for prices in the wholesale beef market. However, substitutability of pork or chicken for beef should not be overestimated. Pork and chicken export levels will be increasingly important to the U.S. beef price levels. In both the broiler and pork export sector the U.S. has experienced fairly stable export levels the past 5 years, although pork exports have seen a slight dip the past two years. Mexico is by far the largest market for both of these export products, and both the pork and broiler industry in the U.S. have evolved to depend on these export markets to keep their respective prices strong and absorb some of the increase in production. Without some growth in those markets compared to 2014 s levels, the increase in U.S. supply must be absorbed in the domestic market, pressuring beef prices. Annual Price Outlook In 2014, fed cattle (5-market negotiated) prices averaged just over $ per cwt., up 23% from 2013 s. The annual average price for Southern Plains feeder steers (auction sales) in 2014 was $ per cwt. for calves and $ per cwt. for yearlings, a 43% and 38% increase compared to 2013, respectively. Over the next several years, a slow ramp-up in cattle numbers is forecast, suggesting that

6 Page 6 beef and cattle prices will tend to gradually erode rather than collapse, barring any outside market shocks like drought or a U.S. economic recession. Forecasts put the 2015 annual average in the $ to $ range, a year-over-year increase of 4% to 7%. During the first half of 2015, prices are forecast to be above a year earlier, but that may change during the second half. By the fourth quarter, fed cattle prices could average a little below 2014 s. Year-over-year increases in fed cattle prices may not occur in Calf and yearling prices in calendar year 2015 are expected to average above 2014 s forecasts call for calves to increase about 13% and yearlings close to 10%. Those are much smaller percentage increases than recorded in As with fed cattle, calf and yearling prices could be below a year earlier by the fourth quarter of Looking further ahead, calf and yearling prices may be unchanged to down slightly in Calf Price Seasonality Three major factors have drove calf prices to record highs during recent years: 1) tighter cattle supplies; 2) record high fed cattle prices (driven by beef supply and demand conditions); and 3) lower corn costs. How those factors unfolded impacted seasonal price patterns. In 2014, the average calf price in the fourth quarter was the highest of the year. (Note that quarterly price includes the ratcheting down in prices that occurred in mid-december.) Normally, calf prices are lowest in the fourth quarter of the year, but that normal seasonal pattern has not held in recent years. In fact, in both 2013 and 2011, calf prices were highest in the last quarter of the year. In 2012, the fourth quarter average was above the third quarter. The last rather normal year was 2010 when calf prices peaked in the second quarter of the calendar year. Prior to 2010, eight of the 10 years would probably be classified as normal, only once (2003) was the fourth quarter the highest of the year and only in 2005 was the fourth quarter average price above the third quarter. For calendar year 2015 cattle, including calf, prices are forecast to be record high. Within the year, LMIC currently forecasts a rather normal seasonal price pattern for calves. Barring an abnormal market shock, calf prices in 2015 could return to their normal seasonal pattern, and be lowest late in the year when most U.S. calves are weaned and sold. Importantly, corn prices are not expected to post further large year-on-year declines, so decreased feedstuff costs is not expected and this will not help raise calf prices late in the year. Still, tight cattle supplies are expected to keep bidding for calves rather aggressive as cattle feeders look to lock-up head for future placement into feedlots. Just like 2014, reputation cow-calf operations may receive bids many months prior to weaning for fall delivery. Waiting to price calves may not continue to pay-off. In the next few months, developing a 2015 calf marketing plan could be time well spent. Without a market shock, rather normal seasonal price patterns should be expected during 2016, too.

7 LMIC Page 7 $ Per Cwt AVERAGE ANNUAL CATTLE PRICES Southern Plains lb Steer Calves lb Feeder Steers Fed Steers Data Source: USDA-AMS, Compiled and Analysis by LMIC Livestock Marketing Information Center Bil. Pounds 6.9 COMMERCIAL BEEF PRODUCTION Quarterly JAN-MAR APR-JUN JUL-SEP OCT-DEC Avg. 2009/ Data Source: USDA-NASS, Compiled & Analysis by LMIC Livestock Marketing Information Center

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