Cattle producers continued to see pressure from lack of good pasture conditions and expensive hay well into fall last year. Cow-calf producers have struggled to retain breeding herd animals in large portions of the West, a situation that was likely avoided in 2020 with availability of government payments. Management decisions including retaining less heifers, weaning early and selling off cows were actively being pursued in 2021.
That stress and the need for cash flow has forced heifers into feedlots and cows to slaughter. Heifer slaughter at the time of writing this was up 5.2 percent, and cattle inventories on feed were recording nearly 40 percent of all animals on feed as heifers—an indicator of further contraction. Beef cow slaughter was also large last year, and January through November was an enormous 10 percent above the prior year.
The Livestock Marketing Information Center (LMIC) is working with an estimate on Jan. 1 of the beef cow herd declining about 2-2.5 percent. There are still several weeks of slaughter left, and the range is still wide on plausible outcomes (down 1.5-2.5 percent). A shrinking breeding herd forms the basis for higher calf prices in 2022 and 2023 and will be a primary driver for cow-calf returns in those years.
Feed costs
The inventory pattern between then and now is highly dependent on feed cost and availability. Drought was a major driver in 2020 and 2021. The La Niсa winter is setting up the southern half of the U.S. to deteriorate further into next spring. Further liquidation in the beef cow herd is already expected in 2022 but may be exacerbated and/or worsened should unfavorable pasture conditions resurface again next spring.
Many producers are still in liquidation mode, and it may take a significant break in the Western drought before producers feel comfortable adding breeding stock.
Replacement costs are expected to be the best gauge for herd rebuilding. Those costs are expected to increase in the coming years but are likely several years away from the peak. Many producers are still in liquidation mode, and it may take a significant break in the Western drought before producers feel comfortable adding breeding stock. However, it is likely that once optimism returns to the cow-calf sector, breeding costs will rise sharply as everyone rushes to rebuild.
Breeding costs
The decline in breeding stock is expected to systematically reduce the size of the calf crop over the next couple of years. Smaller and smaller supplies have LMIC aggressively escalating the average steer calf price forecast and have 2023 reaching over $2 per pound on an annual basis. If those prices are realized, it sets the stage for potential herd rebuilding in 2024 as cow-calf returns are expected to soar to $200 per head. However, breeding costs are likely to be a headwind.
[inline_image file=”e751b39cf8d070610c69057cb13a8188.jpg” caption=”1 cow-calf returns.jpg”]
In 2022, prices are expected to improve from 2021, but they may be more limited by feed costs, which may temper how high calf and feeder cattle prices can rise. Supplies of cattle are expected to be smaller, but the system that saw significant stress last year benefited from strong demand. Inflation may cause beef demand to wane, which will likely feed back through feeder cattle markets and have a very different price pattern than they did in 2021.
A bit of a side note, but a contributing factor that will influence calf prices in 2022 is the dairy herd. The dairy herd is also shrinking, and in recent years, crossbred calves have been a larger proportion of those offspring. The decline in the dairy herd will likely have an implication for the number of available calves in the beef system, but is a difficult number to pinpoint. Without the use of sexed semen, a conservative estimate assumes about half of the dairy offspring end up in the beef supply chain and are backgrounded and fed into feedlots. In the latest milk production report, that would be estimated at about 4.6 million head, or about 13 percent of the calf crop estimated on July 1 by USDA’s National Agricultural Statistics Service.
The use of sexed semen makes it more difficult to estimate the number of dairy-bred animals that will immediately enter the beef system, but the number is likely higher than the 50 percent estimated above. The overall decline in the dairy breeding population will reduce available supplies, but those supplies may still be larger than we would have historically estimated.
Feedlot costs
Smaller calf crops and feed costs are expected to affect feedlot margins as well. Feedlots should expect to pay more for feeder cattle than in 2021, but corn and soybean prices are expected to be lower, helping improve cost of gain.
The ability for packers to continue to pay for fed cattle over $130 will be highly dependent on packer margin.
In late 2021, fed cattle prices soared with heavy beef demand. The ability for packers to continue to pay for fed cattle over $130 will be highly dependent on packer margin. LMIC is not expecting a significant decline in the cutout, but in 2021 and 2020, spring cutout values were unprecedented.
It is unlikely to see such large margins again in the second quarter of 2022, but still expect fed cattle prices to be above $130. The futures live cattle contracts at times have been in the $140s, which would likely need cutout values to be higher than they were in the fourth quarter of 2021. There is still uncertainty regarding beef demand, but overall, feedlots should be able to sell fed cattle on average about 7-9 percent higher than 2021. Feedlot margins are expected to have a better year than in 2021 but are likely to average under $50 per head over the entire year.
[inline_image file=”f80921219e9fb32434ddab5fe0d440a1.jpg” caption=”2 annual cattle prices.jpg”]
Key system changes include the demand profile domestically and abroad. At the time of writing, COVID-19 variant omicron was making headlines ahead of the Christmas season. Impacts of this variant and others still have the potential to rattle the supply chains, as well as markets. Consumer sentiment is one indicator that points toward continued weariness, which may affect beef demand in 2022.
