What can 2011 tell us about the 2012 cattle market?
January 2012
Dillon Feuz
In 2011, record high beef, fed cattle, feeder cattle and calf prices were realized. All of those records may be broken again in 2012. Now that I have your attention, let's examine the cattle market more closely; document those record high prices and examine the conditions that may lead to those records being exceeded in 2012. I will also document that record high prices don't always translate into record high profits.
Choice box beef prices averaged $181 per cwt. for 2011. The prior high was in 2010 at $157 per cwt.; that is an increase of 15%. However, the weekly high of $201 per cwt. set in October of 2003 was not exceeded this past year. Fed cattle prices average $115 per cwt. for 2011, which was a 21% increase over 2010 prices at $95 per cwt. The record high weekly average was $127 per cwt. in November. Back in October of 2003, the record high price observed at that time was $113 per cwt., which was exceeded by this past year's average. Nebraska feeder steers, 800-899 pounds, price averaged $132 per cwt. for 2011. The average price in 2010 was $108 per cwt. On a percentage basis, prices were 22% higher in 2011 compared to 2010. Just looking at fall calf prices, 500-599 pound steers in Nebraska had an average price of $160 per cwt., a 25% increase over the $128 per cwt. price seen in the fall of 2010. Some 5-weight steers sold for over $175 per cwt. this past fall; that is over $950 per head.
Profitability is always a little harder to determine than just observing past prices. Every producer has a different cost structure and a different set of resources to manage. So, while I will give some general profitability numbers, I am well aware that some of you may have had higher profits and some lower profits than what I report here. Any study that has looked at cow-calf producers has always found differences of more than $200 per cow in cost of production from high cost to low cost producers. Furthermore, in reporting profitability for cow calf producers, I am reporting for northern producers who were not adversely impacted by drought. In fact, most producers in the Northwest, Intermountain, and Northern Plains regions saw almost ideal range and pasture conditions in 2011. I suspect that profitability for many cow-calf producers in these regions may have exceeded $250 per cow in 2011. Costs probably did not differ substantially from 2010, but calf values increased by about $175 per head. Due to higher grain prices and higher feeder cattle prices, profitability in the cattle feeding industry is a much different picture than the cow-calf industry. In 2010, feedlots probably average about $75 per head profit. At the start of 2011, those same returns were being realized. In fact, some weeks probably had returns of near $200 per head on finished cattle. However, by late spring-early summer, feedlot returns had turned negative and remained negative through most of the fall. For the year, weekly profits likely averaged just under $10 per head for cattle feeding.
Let's examine the major forces (supply, demand & trade) at work in the cattle industry that shaped 2011, and that will also impact the markets in 2012. The U.S. beef cow herd has been declining since 2007. This past year had increased beef cow slaughter, primarily the result of increased slaughter from areas severely impacted by drought, and replacement heifer retention has also been declining. Therefore, it is likely that total beef cow numbers at the start of 2012 will be around 30 million head, a decrease from 2011 numbers and the smallest beef cow inventory since 1958. Smaller beef cow numbers means fewer feeder cattle to sell and if producers do start holding back more heifers for breeding purposes, that will further reduce the available supply of feeder cattle to enter feedlots. That tight supply of feeder cattle will put upward pressure on feeder cattle prices at all weights. It is interesting to note that even though beef cow numbers were down in 2011 from 2010, cattle on feed numbers were higher. Presumably, most of the increased in cattle on feed numbers were the result of more lighter- weight southern feeder cattle going directly into feedlots rather than into various stockering operations. The expectation for 2012 is that cattle on feed numbers will decrease relative to 2011 and that will result in a reduction in total beef supply for 2012. Reduced beef supply and fewer cattle on feed for 2012 will mean that there will be upward price pressure on beef and fed cattle prices.
Demand was the pleasant surprise in 2011. Through the first three quarters of 2011, demand was stronger in each quarter relative to 2010. I continue to hear somewhat negative reports on unemployment and the general economy and yet consumers increased their demand for beef. Perhaps the economy is not quite as bad as some would have us believe. Retail prices for beef were very strong for 2011, particularly in the second half of the year when even the higher priced beef cuts saw a significant price increase. If we see any improvement in the general economy in 2012, then it is likely that beef demand will also increase in 2012 relative to 2011. This also would be supportive of higher beef prices which would trickle down to higher fed cattle and higher feeder cattle prices.
International trade was also very supportive of higher cattle and beef prices in 2011. Imports of total beef and cattle into the U.S. were lower in 2011 than in 2010. Part of the reason for this is that Canada, Mexico and Australia have all reduced their beef cow inventories in the last few years as well. They don't have as many cattle or as much beef to export as they did in the past. Australia's beef inventory maybe stabilizing, but I would not expect an increase in imports of cattle and beef in 2012. On the other side of the trade ledger, U.S. exports increased in 2011 relative to 2010. We are now back to pre BSE trade ban levels of exports. Hopefully, recent trade agreements with South Korea and other efforts by the USMEF and others will insure that trade continues to expand in 2012. However, with our shrinking beef cow inventory, and positive domestic demand, there may not be much room for growth on a tonnage basis for exports in 2012. In general, trade should also be supportive of higher beef, fed cattle and feeder cattle prices.
In summary, supply, demand and trade are all supportive of higher cattle industry prices in 2012 relative to 2011.