March 31, 2016 Through the first quarter of 2016, cattle markets and prices are stronger than through the third and fourth quarters of 2015. Although not at the record high levels observed in 2014 and 2015, prices remain above historical levels. Industry drivers at the onset of 2016 include: 1) Continued move toward equilibrium in cattle prices: Cattle prices have been historically high for a prolonged period, driven by limited supplies and robust domestic and international demand. In the second half of 2015, forces including elevated carcass weights and competition from other proteins lowered prices. In the first quarter of 2016, prices stabilized; fed cattle prices climbed approximately $8/cwt. 2) Retail beef prices remain high relative to competing proteins: Poultry and pork production has been strong in 2016. The large retail price spread between beef and poultry/pork has helped shift consumer sentiment toward these competing proteins 3) Supply stabilization as U.S. cow herd continues to grow: USDA data show that the U.S. beef cow herd increased nearly 3.5 percent, or approximately 1.01 million head, in 2015. This is the second consecutive year of herd growth. It is expected that herd expansion will continue into 2016, albeit at a lower rate compared to 2015. 4) Export market growth in 2016: The strong U.S. dollar significantly impacted the U.S. cattle industry in 2015 and its ability to market products internationally. However, the USDA projects export growth in 2016 given lower U.S. cattle prices and higher U.S. beef production. 5) Expectation of low input costs: Corn costs have remained stable since September 2014 with the USDA average cost at $3.66/bushel as of January 2016. Cattle and Beef Prices Cattle prices increased during the first quarter of 2016 after significant price deterioration in the last quarter of 2015. Low corn costs encouraged feeders to keep cattle on feed for longer periods. Large carcass weights increased supply more than expected during the fourth quarter of 2015. Beef packers placed discounts on cattle that were too heavy to counter the trend. Discounts proved to be insufficient; year-over- year carcass weight inflation increased from an average of 814 pounds in March 2015 up to an average of 827 pounds through March 18, 2016. With the strong dollar driving a year-over-year decline in export volume coupled with cheaper competing proteins, the combined impact drove a swift correction in cattle market prices. Live cattle futures hit single-day down limits on multiple occasions through December 2015. Prices have moderated since the end of the year with less volatility and more seasonal patterns driving price movements. Disclaimer: This material is for informational purposes only and cannot be relied on to replace your own judgment or that of the professionals you work with in assessing the accuracy or relevance of the information to your own operations. Nothing in this material shall constitute a commitment by Northwest FCS to lend money or extend credit. This information is provided independent of any lending, other financing or insurance transaction. This material is a compilation of outside sources and the various authors opinions. Assumptions have been made for modeling purposes. Northwest FCS does not represent that any such assumptions will reflect future events. 2016 Northwest Farm Credit Services
Fed Steer Price versus 550 lb. and 750 lb. Steer Prices $310 $260 $210 $160 $110 $60 Source: CattleFax Fed cattle prices have shown the most improvement since bottoming out in December 2015, increasing to $137.57/cwt through the third week of March, up nearly 14 percent. Average prices for 550-lb. feeder steers increased 8.5 percent since December to $197.12/cwt. During the same period, 750-lb. feeders increased 3.5 percent to $160.13/cwt. Retail Beef, Pork and Chicken Prices The chart below shows an increasing spread between retail beef prices compared to pork and poultry prices. The chart indicates the tight supply of cattle in 2013 and 2014, which drove feeder and fed cattle prices higher. Costs were inevitably passed on to the retail consumer. Retail Value of Beef, Pork and Chicken $6.50 $5.50 $4.50 $3.50 $2.50 $1.50 $0.50 Fed Steer 550 Lb. Steer 750 Lb. Steer Pork Beef Chicken Source: USDA ERS Summary of retail prices and price spreads Choice beef prices peaked at $6.41/lb. in May 2015 and gradually stabilized at approximately $5.97/lb. at the start of 2016. Despite elevated market volatility seen in the feeder and fed markets recently, retail choice beef prices have shown more resilience. Choice prices have 2
declined 5.4 percent since August 2015. This compares to 24.2 percent and 10 percent price declines for 550-lb. feeder and fed cattle prices, respectively. Retail prices will likely follow a downward trend as incremental lower cost feeders come through the supply chain. However, retail prices are still historically high. The spread between beef and both pork and poultry peaked in May 2015 when the beef/pork spread was $2.72/lb. and beef/poultry was $4.48/lb. Declining beef prices through February 2016 have lowered the spreads to $2.25/lb. and $4.11/lb. respectively. Supply and Demand USDA estimates the U.S. beef cow herd increased to 30.3 million head as of Jan. 1, 2016. This represents a year-over-year increase of 3.5 percent and the second consecutive year of herd growth. All-time lows of 29.1 million head came at the end of 2013. The chart below shows historical beef cow inventories. U.S. Beef Cow Inventory Jan. 1 40 # of Head (millions) 35 30 25 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 Source: USDA NASS Quick Stats CattleFax projects continued herd expansion in 2017 based on the impact of heifer retention over the previous two years. Heifer slaughter as a percentage of total fed cattle slaughter declined significantly in 2015 when the beef cow herd increased over 1.0 million head. Projections for heifer retention in 2016 and 2017 remain aligned within historical levels. The charts below detail the impact herd rebuilding had on domestic beef inventory. Cattle imports increased in 2015 to support domestic consumption trends. Source: CattleFax Cow-Calf Webinar 1/20/2016 3
Herd expansion reduced domestic beef production by 2.3 percent year over year. Slowing domestic production drove import volume to increase by approximately 14.2 percent. The top suppliers of U.S. beef imports continue to be Australia, Canada and Mexico. However, Australian imports are likely to decline in 2016 given significant drought-induced herd liquidation. Mexican and Canadian imports have been down significantly year-to-date and are forecast to be lower through 2016. Mexico and Canada are both struggling with tight domestic cattle supplies and a smaller exportable supply of feeder cattle. Lower US cattle prices have further driven the decline in cattle exported to the US from these countries. The USDA forecasts beef production to increase 3.6 percent causing exports to rebound by as much as 6.3 percent in 2016. Beef export volume declined by approximately 11.7 percent in 2015 as the strengthening of the U.S. dollar relative to other foreign currencies made US beef products more expensive. Export volume in early 2015 was also negatively impacted by the residual impact of the West Coast port labor dispute. U.S. Beef Trade LBS (billions) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (F) Imports Exports Source: USDA NASS Quick Stats Corn Price Trends Corn prices continue a trend of low volatility and stability after coming out of the significant Midwest drought in 2012. The chart below reflects price stability and flat movement starting in the second half of 2014 and continuing year to date. Three consecutive years of record- or near record-setting corn crops have driven the price to its current level. Production is projected to decline in 2016 due to low prices and fewer acres planted compared to the previous two years. 4
U.S. Corn Price per Bushel $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 Jan-10 Apr-10 Source: USDA NASS Quick Stats Input Costs Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Pasture conditions: The U.S. drought monitor reports that mountain snowpack is near to above average at most of the SNOTEL sites. At high elevations in the Western United States, multiple Pacific fronts brought measurable precipitation nearly every day for two weeks. Abnormally dry designations in Eastern Washington, North Idaho and Northwestern Montana were removed to reflect above-normal precipitation and above-average reservoir levels. Moderate and severe drought continue in areas of Southeastern Oregon. Hay: Export channels continue to have high supply levels. Carryover from the 2015 crop is anticipated. Carryover and weak dairy demand are set to lower hay prices in 2016. Fuel costs: Crude oil prices averaged $32/barrel in February. Crude prices are expected to average $34/barrel in 2016 and $40/barrel in 2017. Global oil inventory is expected to continue to increase through 2016. Interest rates: In March, the Fed took no action on the target range for the federal funds rate, which will remain at a quarter to a half of one percent. The Fed now anticipates raising the target rate twice in 2016, retreating from four times as reported in December 2015. Northwest land values: Northwest land values have remained stable with fewer sales due to lack of property availability. Weak commodity markets have prompted lease renegotiations in some areas while landlord-to-tenant sales and strong interest from investors continue to drive overall land values. For more information on land values, visit northwestfcs.com/resources/industry-insights/land-values. In the News CS Beef Packers to open processing facility near Kuna, Idaho: Caviness Beef Packers of Amarillo, Texas, and J.R. Simplot Company have joined forces to construct a $100 million beef processing facility near Kuna, Idaho. The facility is pending permits but is anticipated to open fall 2016. The facility will process 1,700 head per day and is expected to create upwards of 600 new jobs. U.S. economy: According to the Bureau of Labor Statistics, nonfarm employment increased by 242,000 in February; the unemployment rate was unchanged at 4.9 percent. Oregon governor signs HB 4040 supporting removal of wolves from endangered species list: Governor Kate Brown signed HB 4040, which holds that the delisting 5
Outlook process approved by Oregon lawmakers during the 2016 legislative session complied with the law. Brown was urged to veto the bill by environmentalists who argued that the decision was illegal. Wolves were removed from the endangered species list in Oregon in November 2015. Wolves west of Highways 395, 78 and 95 remain protected. The first quarter of 2016 saw stabilization in the cattle market after a volatile latter half of 2015. Prices will continue to move toward equilibrium in 2016 with more cyclical price trends anticipated. Corn and fuel prices are expected to remain at current levels. A strong U.S. dollar will continue to be a headwind in the export market. Conversely, lower U.S. cattle prices and higher U.S. beef production are predicted to help bolster export growth in 2016. Additional Information Northwest FCS Business Management Center http://www.northwestfcs.com/resources/industry-insights CattleFax www.cattlefax.com Superior Livestock Auction www.superiorlivestock.com CME Group www.cmegroup.com Livestock Marketing Information Center www.lmic.info USDA Agricultural Marketing Service www.ams.usda.gov National Weekly Cattle and Beef Summary www.ams.usda.gov/mnreports/lswwcbs.pdf Northern Livestock Video Auction www.northernlivestockvideo.com United States Drought Portal www.drought.gov U.S. Energy Information Administration https://www.eia.gov/forecasts/steo/report/prices.cfm USDA Economic Research Service www.ers.usda.gov Learn More For more information or to share your thoughts and opinions, please contact the Business Management Center by phone at 866-552-9193 or by email at bmc@northwestfcs.com. To receive email notification for this and other market information in the form of an enewsletter, please visit www.northwestfcs.com/resources or contact the Business Management Center. 6