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Beef Cattle Herd Expansion Is Real, at Least for Now

Beef Cattle Herd Expansion Is Real, at Least for Now
Larger than expected calf crop and beef cow herd are a bit negative; Fewer than expected beef replacement heifers are friendly.

All cattle and calves in the United States as of Jan. 1, 2014 totaled 87.7 million head, 2% below the 89.3 million on January 1, 2013. This is the lowest January 1 inventory of all cattle and calves since the 82.1 million on hand in 1951.

All cows and heifers that have calved, at 38.3 million, were down 1% from the 38.5 million on Jan. 1, 2013. This is the lowest January 1 inventory of all cows and heifers that have calved since the 36.8 million head in 1941.

Record high prices for fed cattle, feeder cattle and wholesale beef plus significantly lower hay and grain costs certainly set the stage for long-awaited expansion in the beef cow herd. However, expansion is not guaranteed.

Larger than expected calf crop and larger than expected beef cow herd are a bit negative.

Still, inventory data in Friday's USDA Cattle Report show expansion is underway. The report shows cattle producers had a few more beef cows on Jan. 1 than the trade expected. But they had a few less beef replacement heifers. Those figures suggest producers are leaning a bit more toward keeping cows to expand herds rather than by saving replacement heifers. Record high feeder cattle prices likely pushed cow-calf operators that direction.

While beef replacement heifer inventory came in a tad below trade expectations, producers are still holding more replacements than they did a year ago. Both the Jan. 1, 2012 survey and the Jan. 1, 2013 survey also showed producers holding more heifers as beef cow replacements. Producers want to expand. But the 2012 drought driven feed cost spike and forage shortage aborted those previous intended expansions.

What cattle producers want to do and what grazing, feed cost and market price conditions allow them to do can differ dramatically. Feed cost and forage conditions for this year appear to be the most favorable in at least three years. A large portion of the beef heifers kept for herd replacements will likely find their way into cow herds this year.

But more heifers entering the herd do not mean more beef any time soon. Heifers going into cow herds do not go into feed lots. A heifer nursing a calf is not on her way to a dinner plate. That helps drive the 4.1% expected decline in the other heifer category.

The smaller calf crops of recent years, including a 1% smaller one in 2013 total cattle supplies smaller than a year ago.

Fewer calves and feeder cattle available and more of the heifers that are available going into cow herds, rather than feed yards, mean beef output will not expand any time soon.

Wholesale beef prices heading lower. The phenomenal January run of wholesale beef prices is over.  Choice boxed beef prices peaked Wednesday, Jan. 22 at $240.05/cwt. Select topped out at $237.44 that day. By Friday morning Jan. 31,  choice had skidded to $227.97, with select at $228.58.

Oklahoma State University economist Derrell Peel explains several of the factors at work in the current wholesale beef market.  Clearly supply reductions are a major driving factor.  Year to date beef production is down 10% from 2013 January levels, with cattle slaughter down 10.6% year over year so far this year.  This follows a nearly 10% drop in beef production the last week of December, 2013, due in part to a fire that idled one major packing plant for much of Christmas week.  Another factor is that this market rally has been driven almost entirely by Chuck and Round products, rather than by middle meats of ribs and loins.  Additionally, the cutter cow cutout is up $10/cwt. from year ago levels; all of which indicates that this rally is driven by mostly by ground beef and processing beef demand. 

Beef Cattle Herd Expansion Is Real—at Least for Now

The more than 11% drop in cow slaughter in the fourth quarter of 2013 probably played a significant role in setting up the supply reductions that helped drive the January rally.  The unusually small Choice-Select spread at this time is due to a combination of increased demand for select and decreased supply of select relative to choice.  The percent of cattle grading Choice continues to run well above year ago levels, as it has since Zilmax was removed from the market last fall.

Cash cattle prices slipping as well. Tight supplies of feedlot-ready cattle will help support fed prices. But collapsing boxed beef values will intensify pressure to push fed cattle prices back down some.  January's USDA Cattle on Feed Report showed that January feedlot inventories were down 5% from year earlier levels. 

Longer term perspective is shown with the January on-feed inventory declining from the previous month, confirming that December 2013 was, as is typical, the seasonal peak in feedlot inventories.  However, the December, 2013 seasonal peak was the smallest December peak since 1996. The fractional year-over-year rise in December placements does not change the fact that feedlot supplies will be very tight in the months to come.

Fundamentals remain firm. After such a dramatic run, a pullback in both wholesale beef and fed cattle prices is more expected than not.  The big unknown is just how much prices might drop back.  While a series of very short run factors have contributed to this unexpectedly large and rapid increase, the underlying longer term fundamentals are in place to support strong prices. 

Part of the current market run has been due to short-bought retailers and post-holiday refilling of pipeline supplies. It is not clear how much is due to demand strength looking forward.  Assessing demand will be an on-going process.  Meantime, supplies will likely stay relatively tight.  Winter weather could play an especially important role in the ability to rebuild short run supplies.  The market picture may clarify significantly in the next two to three weeks.

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