After posting all-time record high cash prices the third week of March, the following week left cattlemen wondering if they were witnessing another black swan event that might thwart the spring rally. The news that Highly Pathogenic Avian Influenza (HPAI) was the mysterious disease impacting dairies in the southern Plains rocked the futures markets and shaved $2 to $3 per cwt. off cash prices the final week of March.
But HPAI was not a black swan, analysts believe. Rather, it was an opportunity for correction in a market that remains full of bullish fundamentals.
“The futures markets reacted to uncertainty, not knowledge,” says Oklahoma State University livestock economist Derrell Peel. “That’s what futures markets do:
Initially, they anticipate the worst and then find out what is reality. Most of the time it’s not as bad as initial fears.”
Indeed, the days following provided details that HPAI would not produce a ripple effect through cattle markets. However, it did offer an opportunity for analysts to reinforce the markets’ strong fundamentals.
“HPAI gave us a pause, but there are other factors at play, including inflation uncertainty,” says Kansas State University livestock economist Glynn Tonsor. “We need to remember the overriding fundamentals of this market are quite supportive of prices.”
Peel and Tonsor both believe the late-March futures correction could be viewed as “healthy” for the market long-term, though they recognize the volatility of an $8 to $10 futures decline is quite stressful. They have not lowered their outlook for cattle markets.
RECORD PRICES
Through the first quarter of 2024, cattle markets produced unprecedented results. Average U.S. calf prices recorded new all-time highs for eight consecutive weeks, with 550-lb. steers topping $3.20 per cwt. That represented a $40 per cwt. increase since Jan. 1. Despite the HPAI pullback in March, cattle markets are expected to trend higher.
“I don’t think we’re done with record highs,” Tonsor says. “Going forward, especially with feeder cattle, we’re going to continue to see higher prices.”
Demand for calves and feeders has been strong throughout the first quarter but falling grain prices have added further positive news for margin operators. Through March, Omaha cash corn prices were more than $2.40 per bushel lower than in 2023. That amounts to a 37% reduction in feed costs for finishing a steer in a feedyard compared with last year, according to Sterling Marketing’s weekly Beef Profit Tracker.
“Those lower feed costs have been offset by the rising first cost of the feeder steer,” says Sterling Marketing president John Nalivka. “A year ago, the 750-weight feeder cost $185 per cwt. Now, that same steer is costing $255 per cwt. The cost of the feeder steer represented 66% of the cost of finishing a steer last year but has jumped to 78% this year.”
Rising feeder cattle prices have not, however, slowed the desire to place cattle on feed. In fact, the three monthly cattle on feed reports USDA has provided this year show feedyard occupancy has been climbing since October of last year. Given the reduced supply of feeder cattle and the fact ranchers have significantly reduced their cow herds, high feedlot occupancy is not sustainable.
“Feedlot inventories have been stubbornly large,” Peel says. “Some of the recent increases in feedlot inventory is due to short-run changes in timing, such as pulling cattle ahead, and some is due to feeding to heavier weights. But the increases are not sustainable given the smaller overall cattle supplies.”
EXPANSION SIGNALS
The highest prices in a cattle cycle are produced when expansion begins. Ranchers holding heifers for breeding rather than selling them as feeder calves further reduces the available supply of cattle that can go on feed. That’s the point of highest calf prices and profitability for ranchers, and a point of caution for margin operators such as backgrounders and feedlots.
“We know that has not happened,” Peel s. “Many ranchers are in between what they want to do and what they can do because of moisture. Producers see there remains a lot of risk for drought and they are going to proceed cautiously.”
While drought remains a significant variable to expansion, rancher finances also play an important role. Prior to last year’s bull market, ranchers experienced several lean years. Rain or not this year, many of those ranchers will opt to sell heifers as feeders.
“I believe there will be some retention this year, but not enough to matter nationally,” Tonsor says. “I’m expecting a typical cow-calf operator to be cautious and sell a calf for $2,000 versus holding it back. Because of that, I don’t think we’re going to pull the trigger in aggregate on expansion this year.”
Analysts believe a more likely scenario is for expansion to begin next summer, a fact that would further squeeze feedlots. Since 2018, the U.S. calf crop has declined by 7.5% resulting in a total reduction of 2.72 million head in that six-year period. The 2024 calf crop is expected to be lower still with a smaller beef cow herd at the beginning of this year. The calculated feeder supply on Jan. 1, 2024, was the lowest in data available back to 1972.
“If we look out over the next two to four years, feedyards are going to have open bunk space,” Tonsor says. “We’ll see them make some adjustments to try to keep occupancy up, but once expansion begins in earnest it will be quite difficult.”
CONSUMER DEMAND
Analysts and observers have been pleasantly surprised with beef demand as inflation has driven food costs higher the past two years. For beef, that inflation is about to further increase if fed cattle prices rise as anticipated.
To date, consumers have shown little decrease in their appetite for beef. The overall economy has been strong despite the inflation worries. Interest rates, however, could create further consumer angst later this year without some relief.
Federal Reserve Chair Jerome Powell seems to be in no hurry to cut interest rates.
“The economy is strong right now, the labor market is strong right now and inflation has been coming down,” Powell said earlier this month. “We can and we will be careful about this decision [to cut rates] because we can be.”
