COVID-19 is continuing to add to the mix of market uncertainty, but has moved from the forefront as slaughter levels have returned to nearly normal—however, there is still a backlog of fed cattle to work off. Importantly, moving to the foreground is the recessionary direct pressure to consumers and their abilities to purchase beef in the U.S. and abroad. The U.S. economy and the consumer’s ability to spend money on beef is the primary driver in the short-to-medium term and will influence the supply chain decisions down to the cow herd producer.
Economic impacts
Will the U.S. economy post positive GDP in 2020? Likely not. The economy has not recovered, but federal stimulus dollars continue to boost certain aspects. At the time of this writing, the stock market was still seeing solid gains, despite many states stepping away from reopening measures.
The economy has not recovered, but federal stimulus dollars continue to boost certain aspects.
Another round of stimulus was also being sorted out in the halls of Congress, and it looks like there will definitely be additional measures, but what that looks like is unknown. Points up for debate include unemployment benefits, Paycheck Protection Program loans to businesses, and more direct payments to individuals.
The COVID-19 pandemic has completely crippled several industries that beef directly benefits from: travel, hospitality, and, most directly, restaurants. This continues to be worrisome for the beef industry and the U.S. beef demand profile in the second half of 2020. U.S. beef exports have been mixed this year as well, contributing to demand worries regarding overseas customers. The world’s appetite for U.S. beef is an important factor as well.
The International Monetary Fund (IMF) periodically releases economic predictions for a range of countries. The June data showed a sharp decline from predictions that were made in April. The U.S. is expected to have a real GDP contraction of 8 percent this year. If true, this would be the largest contraction since 1946 in 2012 dollars. It’s not just the U.S. that is expected to struggle, though. The world is expected to decline 4.9 percent from 2019.
Key U.S. meat and livestock trading partners and competitors also are expected to face increased struggles. Both the Argentine and Brazilian economies likely will contract by over 9 percent this year. Canada is projected to be 8.4 percent lower, similar to the U.S. drop. Importantly, for U.S. meat and poultry exports, Mexico is expected to have a year-over-year GDP decline of more than 10 percent.
Asian partners are expected to do a bit better, though year over year in that region is a mixed bag—Japan is looking at -5.8 percent, China up 1 percent, South Korea down 2.1 percent, Hong Kong down 4.8 percent, and Vietnam is expected to increase 2.7 percent. In 2020, the countries of Oceana are expected to post GDP declines; for the year, Australia is projected to decline over 4 percent, and New Zealand may drop by more than 7 percent.
According to the IMF, these contractions are expected to be rather short lived, and predicts better economies across the world in 2021. Year over year, the U.S. economy is forecast to grow by 4.5 percent. For the world in total, the annual 2021 rebound is estimated at +5.4 percent, with all regions achieving positive growth rates.
Cattle inventory implications
The July 1 cattle inventory report showed the U.S. beef herd slightly contracted compared to last year and was largely in line with pre-report expectations. The number of beef heifers for replacement was even with a year ago. Over the last few years, the beef cow herd has done some aggressive culling, and generally speaking, the breeding herd has lowered its average age. Beef cow slaughter resumed high levels after working through the bottleneck at the slaughter plant level in the second quarter, implying further liquidation.
The second half of 2020 is likely critical to determine if cow-calf producers will further liquidate.
July might have been the tipping point if these inventory levels continue. The Jan. 1, 2021 Cattle Inventory could show an even steeper contraction in beef cow numbers. Drought and hay supplies are a concern in some areas of the U.S. Pasture and range conditions continue to worsen in the Great Plains, West, and Southern Plains. The Southern Plains is showing the worst conditions with 40 percent of pasture and range conditions rated very poor in the middle of July.
On a more positive note, calf prices have held together fairly well. Across the regions, 400-500-lb. steer calves and 500-600-lb. steer calves are within spitting distance of a year ago in most markets. Nebraska has had some of the most change of the markets the Livestock Marketing Information Center (LMIC) tracks, down 5-7 percent from last year at the end of July.
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The fall calf market will likely be a determining factor for many producers and will ultimately make or break their year. Feed costs are still expected to be below a year ago, which should steady the feeder and calf markets, but the second half of 2020 remains critical.
Second half of 2020: Key drivers
The second half of 2020 is likely critical to determine if cow-calf producers will further liquidate. The drought monitor shows trouble spots across the U.S. and breeding decisions for next year’s calf crop are in process. Fall weaned calves look to still price similar to a year ago and could be even higher than a year ago in the fourth quarter. This will be commanded by the demand for feedlots, the economics of calf feeding, winter forage prospects, and optimism regarding fed cattle prices at time of marketing.
The amount of optimism in the cattle industry will follow the economic trends.
Feedlot margins have had an up-and-down 2020 and are not out of the woods yet. Third quarter fed prices are expected to be similar to second quarter 2020, and in July look to be lower. Seasonally, fed cattle prices typically decline in the July through October timeframe, and increased finished cattle on feed supplies will continue to pressure fed prices during this timeframe.
Smaller placements in the spring of this year though should result in tighter fed cattle supplies in the fourth quarter of 2020 after working through the backlog. This should start to increase fed prices by the fourth quarter of 2020 and early in 2021. It would also indicate that feedlots will have plenty of space to stock cattle.
The July Cattle on Feed report indicated that to some extent, feedlots did fill pens, as placements were 2 percent above a year ago. LMIC calculated cattle placed in June face breakeven near $105/cwt, assuming marketing in December. The December live cattle contract at the time of this writing was just above that at $108/cwt. Fed cattle prices will need to improve and stabilize from where the live cattle contract is in the first quarter of 2021 to pull through higher calf demand.
In addition, feed prices of corn and soybeans will be critical to the demand for feeder cattle and calves in the second half of 2020. The June Acreage report slashed the Prospective Plantings corn acreage from 97 million acres to 92 million acres, and soybeans acres increased from the March estimate of 83.51 million acres to 83.825 million acres. Even though the acreage report is bullish for corn prices, weather is expected to drive favorable yields this year.
The July WASDE report estimates yield for corn at 178.5 bushels per acre and near-record highs for soybeans. This puts a positive light on feed costs, and the LMIC carryout estimate for 2019/2020 is over 2.5 billion bushels. Demand may be an issue for corn in 2020/21.
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Travel and the resumption of fuel use will be a limiting factor for ethanol use into the next marketing year as well. Based on LMIC cattle, hog and sheep forecasts feed use is also expected to decline in the next corn marketing year. The combination will limit upward movement in corn prices, and likely build corn carryover heading into 2021-22.
The amount of optimism in the cattle industry will follow the economic trends. Live animal and beef prices could continue to struggle if sections of the economy continue to experience closures, or consumers are hesitant to participate. Retail demand is only a portion of the beef demand sector and without restaurants and food service sectors coming back substantially by the end of the year, the cattle industry will face an uphill battle and likely add to cold storage levels.
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Competing meats face some of the same headwinds, but at a discount to beef. The financial strength of the U.S. consumer is expected to play a key role in the second half as it relates to which products move and those that get left behind.
Outlook
The LMIC is projecting beef production in 2021 will contract to about 1.5-2 percent, and that trend to continue into 2022, down 1.5-2.5 percent. Normally, cattle prices would appreciate as beef supplies tightened, but the demand picture for the next several years is closely linked to this pandemic; it’s difficult to say what prices will do. The vaccine prospects and the economy remain key drivers for the next several years with the cattle cycle reactionary to these large world events.
