Sometimes it’s good to be wrong. Demand for U.S. beef has been much stronger than anticipated in 2022, both from overseas and the U.S. consumer, which has doubled down on upward pressure to fed cattle prices. Shorter supplies of fed cattle have also helped boost prices—a factor that is here to stay in the next two to three years.
There have been a lot of nuances in the cattle markets this year. There have been high prices at the retail level, yet consumers have not backed away. Packer margins have eased back toward normal levels, but cattle prices managed to bridge over June, typically the lowest month of the year. June 2022 negotiated cattle in the five-area region averaged $142.79/cwt, the highest monthly average price since 2015.
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This is all with Cattle on Feed numbers remaining above a year ago and steady drought placements over the last nine months or so. In addition, beef supplies have not been lower. Cow slaughter has been at a record pace, continuing to support overall supplies.
The Livestock Marketing Information Center (LMIC) has had to revise beef production forecasts several times this year to account for the increase in beef cow slaughter. However, that means those animals will not be available next year for slaughter or breeding. This will systematically accelerate the pace at which beef production will decline in the coming years. Smaller calf crops, and at some point heifer retentions, will result in smaller and potentially dramatically smaller beef production.
Liquidation phase still in effect
The July USDA Cattle Inventory report released on July 22 indicated the liquidation phase of this cattle cycle is nowhere near over. Beef cows over 2 years old were listed as down 750,000 head, or about 2.4 percent from last year. Further emphasizing the liquidation phase was a sharp drop in the number of beef heifers held for replacement, down 3.5 percent from a year ago. At 4.15 million head, this is the lowest beef heifer replacement count on record back to 1973. This implies that the beef cow herd will likely shrink again next year by at least half a percent.
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However,given the current and forecast high fed cattle prices, it seems likely that feedlots will incentivize selling heifers into the beef production system instead of leaving them in the reproduction channel. Drought has been a driving factor in the last several years, making some of the decisions above involuntary.
There is considerable opportunity in upside price potential for calves and breeding stock as the U.S. approaches the bottom of the cattle cycle. Demand for breeding stock has been pocketed, but as evidenced by the cattle inventory, there may not be many young breeding stock around.
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Producers deciding when to ramp up may have a difficult time trying to outguess the replacement market. Often, during large swings in inventory, replacement prices accelerate very quickly if the weather cooperates. It is expected this cycle will do something similar. There may be considerable opportunity in the next two years for bred heifers in particular, as those will be in short supply.
Feed costs likely to prevail in short term
Feeder cattle prices across all weight groups are expected to improve in 2022, 2023 and 2024. The Cattle Inventory report indicated that the calf crop supplies on July 1 were lower than a year ago by more than 1 percent, continuing the multiyear decline in smaller feeder cattle. This year, drought and feed costs have had significant influence over the feeder cattle market.Feed costs are not expected to improve substantially next year, but with better pasture conditions, cattle will be able to stay on grass longer, switching leverage toward cow-calf producers.
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The next two years’ costs are expected to erode revenue gained, but inflationary tendencies may subside, and feed costs are expected to decrease by 2024, while calf supplies remain tight. LMIC expects returns over cost in 2024 to be the highest since 2013. These years of steady and increasing profitability are expected to set the stage for the contractionary period to end and the cattle cycle to enter expansion at some point in 2024-26. How long the expansion will last is unknown.
Looking forward
Fed cattle prices will be influenced not only by cattle supplies, but also by the economic environment of the U.S. and the world.Economic firms have actively reduced expectations for growth in 2022, and inflation has caused many advanced economies to tighten their monetary policies simultaneously.
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This is going to be a headwind for global economic growth, but in some respects, it has worked out well for beef because all prices are rising relative to its price. World demand has been excellent in 2022 and is expected to remain at a relatively high level, even with an economic recession in the works. A deeper recession may slow buying in the near to medium term.
Similarly,the U.S. household has eroded savings since the high levels of the pandemic, but household debt has not climbed substantially as of the first quarter of 2021.That figure may help determine what changes may be seen in the meatcase as households feel greater financial pressure. Still, lower cattle supplies are unlikely to allow beef prices to move sharply lower, even in a recession environment.
The 2023 production outlook for U.S. beef is currently estimated at 4 percent down from 2022, assuming cow and heifer slaughter substantially slows next year. This is expected to allow for fed cattle prices to rise 7 percent and average over the year about $148-152/cwt in 2023.
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Southern Plains feeder steer prices are expected to increase by more than $10/cwt on an annual basis, or about 7 percent for 700-800 pound feeders ($173-177/cwt annually in 2023). Steer calves will likely rise as well, but they are currently expected to rise less than heavier-weight feeder cattle—about 3 percent—but there is considerable upside to calf prices in 2023.
