Jolley: Five Minutes with Steve Kay (Again)

It's time for my annual year end wrap up with Steve Kay, the headmaster of the cattle business.

He's been publishing Cattle Buyers Weekly for nearly three tumultuous decades, giving him a front seat view of every twist and turn of the industry.

As I've done from the very beginning, I ask him a series of questions about the most important issues and he gives his blunt responses.

Lately, though, he's taken a more active role in this series of interviews. Not content to just answer the questions I throw at him, he uses his knowledge of the industry to politely suggest a better question or two.

Being the smart man I am, I always defer to the smarter people among my friends, so I let him have his way.

So here we go again: answers to some of the most pertinent questions facing the industry as we enter the new year.

Q. What is the biggest issue facing the U.S. cattle/beef industry in the coming year?

A. Three words - protein, protein, protein. Beef, pork and chicken production will each be larger in 2017 than in 2016. This will push total red meat and poultry supplies over the 100 billion pound mark for the first time and mark the third straight year of record supplies.

How beef performs in the face of cheaper pork and chicken will determine prices for all classes of cattle this year. Strong demand at home and abroad is therefore essential, especially as cattle numbers will be slightly larger in 2017 than in 2016. Larger supplies in 2016 meant total cattle slaughter for the year to December 10 was up 1.515 million head or 5.6% on the same period in 2015. Total slaughter in 2017 will be larger again, as beef herd expansion continued in 2016, albeit at a slower pace than in 2014 and 2015.

The positive news is that beef demand from last June was stronger than expected. Sharply lower wholesale beef prices allowed retailers to aggressively promote beef. The meat merchandising trend of the year was the level of steak featuring. Lower prices meant Americans re-discovered their love of a good steak and bought a lot of them. But ground beef sales suffered as a result. Lower prices also boosted beef exports, with especially strong sales to top market Japan. This increase in sales was in part driven by a dramatic year-on-year decline in exports to Japan from Australia.

Q. Last time we talked, which was a year ago, one of the big topics was the size of the beef herd. A few years earlier, it had just dipped to its lowest point in more than 60 years. Where are we now?

A. The total U.S. herd likely expanded 1.6% in 2016 from 2015 after a 3.2% increase that year from 2014. So the herd went from 91.988 million head on January 1 2016 to an estimated 93.5 million head on January 1 2017. Growth this coming year is expected to be less than 1%.

All this growth has come from an increase in beef cows. The herd will still be lower than it was in 2010 and will be far below the record of 132 million head in 1975. It's hard to imagine the national herd getting much larger than 95-96 million in the foreseeable future.

Q. What has been the impact of increased cattle numbers?


The most painful impact has been a sharp reduction in live and feeder cattle prices. Live cattle prices in early December were 7% below the year earlier week. But the weekly low of the year in mid-October saw prices down 27% year-on-year. Feeder cattle prices then were down even more, by 35-40%. They also recovered somewhat by early December but were still down 16-20% on a year earlier.

This meant cattle feeders continued to lose money for at least the first ten months of 2016, losing the most equity in history since the start of 2015. Cow-calf operators saw per cow margins evaporate. Conversely, more cattle meant packers and cattle were able to run their plants and feedlots, respectively, at more efficient levels. And as noted, lower wholesale beef prices led to a rebound in beef demand.

Q. Can producers expect to see even lower prices in 2017, given that numbers will increase again?


That seems likely but not necessarily a certainty. Two key factors will be at play, demand being the first. Even stronger demand at home and abroad could put a floor under cattle prices. Second, cattle feeders can play their part by marketing cattle at lighter weights. Fewer pounds per animal could largely offset an increase in fed steer and heifer slaughter each week.

Q. Are there important growth markets in other parts of the world that might absorb some of our increased beef production? What about President-elect Trump's vow to renegotiate NATFA? Will he be a friend of American farmers?


The U.S. depends on export markets for beef, pork and chicken. Beef depends on key Asian markets and on Mexico and Canada. The industry, led by the U.S. Meat Export Federation, has done an outstanding job of diversifying into niche markets all over the world. Contrary to the approach of 30 years ago, the approach now is to find out what kind of beef products those markets want and then supply them.

The tragedy of the presidential election for the beef industry was that both candidates struck fatal blows to the U.S. joining the Trans-Pacific Partnership. TPP membership would have helped U.S. agriculture considerably. For beef, it would have meant a huge reduction over 15 years in tariffs on U.S. beef going into Japan. Now U.S. beef is saddled with the current 38.5% tariff while the tariff on Australian beef is already much lower and will continue to decline. The National Cattlemen's Beef Association says the U.S. is losing $400,000 per day because of the tariff remaining the same.

The industry should also be extremely concerned that President Trump does not start any kind of trade tiff with China. This could give China an excuse to keep U.S. beef out of the country, even though it agreed last fall to reopen its market. Shipping beef to China in 2017 will be the single most significant boost to exports and the overall cattle/beef market.

Trump's vow to renegotiate NAFTA is even more damaging if he goes through with it. Any attempt to add tariffs to Mexican-made goods or put up trade barriers would disrupt the highly integrated nature of the North American cattle and beef sectors. As for Trump's vows to build a wall on the border and expel illegal immigrants, both moves would be equally damaging. U.S. agriculture depends on a steady flow of immigrants as permanent or seasonal workers, and in mid-December was already making Mr. Trump aware of that. He will only be a friend of American farmers and ranchers if he promotes free trade rather than tries to restrict it, leaves NAFTA alone and treats Mexico as an important component of the success of many U.S. businesses.

Q. Last year you were concerned about the viability of the cash live cattle market and were unhappy about the health of the futures market. Where are we now in regard to both markets?


Both remain vital for price discovery so it's encouraging to see what occurred in 2016. The negotiated cash trade increased to more than 25% of all sales nationally, from 21.3% in 2015. This was to be expected as cattle numbers increased and packers said they wanted to buy more cattle on the cash market. The percentage will increase again in 2017. Another small but significant boost for the cash market came with the start of the Fed Cattle Exchange's weekly auctions. The auctions saw small numbers of cattle consigned but the Wednesday auction often set the tone for country trade, and will continue to do so.

The futures market meanwhile was less volatile in 2016, and we seldom saw the irrational swings from day to day. It seemed unduly negative at times and ran at a discount to cash prices most weeks. But the silver lining to this was that hedged cattle feeders could use this to sell cattle.

Q. What about Brazil's continued domination of the global beef trade, especially in terms of cattle numbers?


USDA forecasts that Brazil's cattle numbers in 2017 will increase to 226 million head, up 6.9 million or 3% from 2016. Brazil also is now exporting fresh beef to the U.S. and will send more in 2017. None of this though should concern the U.S. industry. Brazil's beef is only partly filling a hole left by a sharp decline in imports of Australian manufacturing beef.

More importantly, U.S.-produced beef is of far superior quality to Brazilian beef. That's why it is sought after in many countries around the world. U.S. cattle producers have done an outstanding job in upgrading their beef cow herds over the past 20 years. That's why cattle now grade 75% Prime or Choice, versus less than 50% 20 years ago. The key to the ongoing success of the U.S. industry is to keep improving the quality of cattle and the beef they produce, and to pay even closer attention to what American consumers want.


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