Feeding margins with red ink will continue into September, but in general the losses are not crippling. I expect to see closeouts turn positive during the fourth quarter even in the face of somewhat higher, but manageable breakevens at the end of the year—repeat—manageable breakevens. Relatively strong feeder cattle prices are being partially offset by lower feed costs. And, I would not be talking out of school to say packer margins have plenty of room to accommodate higher fed cattle prices going forward.
The impact of drought will be key to the tally of the U.S. cattle herd as the industry moves through the remainder of this year. Beef cow slaughter year-to-date through early July was up 11% from a year earlier, while heifer slaughter was 8% higher. Dairy cow slaughter year-to-date is up 4% from 2017 through early July. My analysis suggests producers will cull out and send to slaughter 9.4% of the January 1 beef cow herd this year, the highest cow slaughter since 2013. With the year half over, these stats don’t bode well for continued herd expansion – to say the least. Coupled with sharply lower heifer retention, the size of the January 1, 2019 beef cow herd will remain unchanged from a year earlier.
To say the mid-year cattle inventory (of which I have very little confidence) indicated sharply slower expansion would be optimistic. Forage conditions don’t provide much fodder for optimism going forward. And in many parts of the West, the other issue is stock water. Oh, one last note - I do think USDA’s first estimate of the 2018 calf crop is too high given the reduced number of heifers likely calving this year.