Despite Slowing Herd Expansion-- Can Domestic, Export Beef Demand Keep Pace? Presented by Mike Sands MBS Research Forecasting Agricultural and Biofuels Interplay The Jacobsen--Chicago May 23, 2018 1
Livestock Production and Price Prospects vlarger cattle inventory, growing calf crops, and rising feeder cattle supplies but pace of increase has slowed vfeed costs may firm amid tightening world carryover stocks vmoisture/pasture conditions have deteriorated Plains, Southwest vtightening carryover stocks limit weakness in feed costs vgrowing fed cattle supplies; prospects for heavier carcass weights vlarge competing meat supplies bolstered by expansion in chicken & pork production capability vdomestic meat supplies may be tempered by larger exports, smaller imports; export risks heightened by accelerating trade tensions vprices likely to remain on the defensive; expansion pace slowing, but risk to most prices is that rallies will be modest and short-lived and subsequent declines may be larger than projected
Eroding Carryover Stocks, Weather Uncertainty, Trade Tensions... Fewer acres, smaller 2018/19 corn crop, and eroding carryover stocks keeping support under prices amid continuing trade tensions Firming basis and rebound in futures boosting elevator bids underpinning increases in cost of gains Expanding livestock production adding to feed usage, disappearance; tempering prospects for significant price declines 3
Moderating Cow-Herd Returns Tempering Expansion Incentives Restoration of stocking rates from 2011-12 drought along with record calf, feeder cattle prices have spurred sharp rebound in the cow herd and cattle inventory However, expanding dryness/drought in Southern Plains; lingering dryness in the Northern Plains; risk of higher feed costs poses a challenge to further herd growth 4
Drought in the Southwest has Intensified; Lingering Dryness in the Northern Plains Besides intensifying drought in the Southern Plains; escalating perceived risk of expansion into the Western Cornbelt Lingering dryness in the Northern Plains a carryover from last year 5
Aggressive Inventory Rebuilding is Slowing, But Further Growth Likely During 2018 Jan 1 cattle inventory up by 700,000 head from a year earlier and 5.9 mil off the cyclical low at the beginning of 2014 Larger cow herd at the beginning of the year; and subsequent growth in the calf crop may boost the inventory by another 400,000 head at the beginning of 2019 6
Larger Cow Herd, Coupled With More Heifers Retained, Points to Further Herd Growth But Slower Pace Jan 1 cow herd up by more than a 500,000 head from last year Although culling rates are rebounding from the low levels of 2014/15, they remain historically modest More moderate number of heifers being held as herd replacements; more on feed; larger cow slaughter; will continue to moderate cow herd growth limited risk of herd liquidation 7
Still Large Number of Heifers Held as Herd Replacements Despite more heifers on feed and increased heifer slaughter number held as herd replacements at the beginning of the year still large Some retained heifers could still be diverted to the feedyard Despite lower feeder cattle, calf, cull cow prices, some areas still bringing stocking rates back to pre-drought norms but now challenged by renewed drought threat 8
Beef Production Rebounding From Historic Lows in 2014/15 Amid Aggressive Herd Expansion Larger beef production fueled by both more fed cattle and more cows in the slaughter mix Carcass weights likely posting seasonal lows in May and will remain well above last year, adding to beef tonnage; long-term uptrend persists and weights expected to advance in the year ahead Further production increases in 2019 and, projected growth may carry through 2020 9
Despite Larger US Production, Limited Decline in Beef Imports; Key Suppliers/Competitors Expanding Rebuilding Australian cattle inventory has tempered shipments to the US and helped bolster larger US shipments to Asian destinations Transition to larger Australian herd, larger US shipments, and stiffer competition for Asian market share Mexico has shifted from a net importer of US beef to a net exporter Prospects for larger imports from Central & South America--Brazil 10
Larger Exports Reflect Larger US Production, Lower Prices, Smaller Output from Key Suppliers/Competitors Record exports in 2017 may be extended in 2018 Largest export potential remains in Asia Japan, S. Korea, Hong Kong/China Escalating trade tensions NAFTA, S. Korea, China, etc.-- could hamper growth Rebound in US dollar less supportive Production growth in key competitor suppliers more of a challenge to maintaining US market shares 11
Increases in Domestic Disappearance Tempered by Larger Exports, Smaller Imports Although 2016 production up more than 6%, domestic supplies post a more moderate rise, limited by larger exports and smaller imports will continue to temper domestic availability Domestic beef supplies not burdensome, by historical standards, but further growth likely Amid expanding production, vulnerability to slowdown in exports will bolster domestic supplies 12
Feeding Margins Back in the Red Following A String of Favorable Returns Earlier in the Year Eroding feeding margins have tempered interest in feedlot placements Larger supplies of feeders and deferred LC premiums may encourage a rebound in placements after mid-year; could be derailed/encouraged by higher feed costs, drought 13
Smaller Feedlot Placements This Spring; A Rebound After Mid-Year? Limited spring placements hampered more by eroding feeding margins, large feedlot inventories in W. Cornbelt, fewer on wheat pasture/small grains Summer pasture conditions may alter placement pattern Growing feeder cattle supplies and more moderate feedlot inventories may spur rebound in placements during the last half of the year; supported by premiums on deferred LC futures 14
Large Fed Cattle Supplies Sustained Into Summer Poised to Moderate Into Late Summer/Fall Slaughter volumes seasonally large though spring into early summer months Late summer/fall fed cattle supplies expected to erode; a sharp contrast to the counterseasonal increase the past couple of years Recent declines in carcass weights, grading hint marketings current despite increasing front-end supply Capacity challenges still an issue? 15
Larger Cow Herd & Rising Culling Rates Spur Cow Kill Total cow slaughter projected near 7% larger this year; another 5% rise projected for 2019 Slaughter increases reflect both a larger cow herd and higher culling rates Higher culling rate and rising female slaughter signals slowing herd growth; but little indication of liquidation YTD beef cows up near 10%; Dairy 5-6% 16
Weekly Cow Slaughter Trending Seasonally Higher Weekly volumes recently shrinking back near 115,000 from late winter peaks above 120,000 Deteriorating early spring pasture conditions and escalating forage costs remain a caution flag Seasonal decline into early summer to support lean beef prices, despite prospects for larger imports 17
Seasonal Changes, Growing Beef Output Slaughter, beef production to moderate into late summer/fall from large spring volume Slaughter mix shifting to include seasonally more fed cattle and fewer cows Fed cattle carcass weights likely posting seasonal lows-- likely will continue to exceed year-earlier although marketings remain current 18
Increases in Domestic Disappearance Tempered by Larger Exports, Smaller Imports Although 2016 production up more than 6%, domestic supplies post a more moderate rise, limited by larger exports and smaller imports Domestic beef supplies not burdensome, by historical standards, but further growth likely Larger production, slowdown in exports will leave larger domestic supplies 19
Strong Price Performance in 2017 Has Elevated Expectations Domestic fed beef supplies up modestly in 2017, but prices held well above historical relationships Preserving that strong price performance suggests a $195-$205 blended cutout compared to around $207 last year Risk of reversion to more typical relationship could lead to an average closer to $175 20
Despite Larger Supplies, Strong Beef Demand has Elevated Price Performance and Boosted Expectations for the Year Ahead Cutout values have held well above historical relationships during the past year preserving that strong demand a continuing challenge Rising incomes/wages, economic growth is demand supportive; larger competing meat supplies, higher energy costs, rising value of $ could be a drag on beef demand Risk of reversion to more typical demand relationship, along with larger supplies, a caution flag 21
Larger Fed Beef Supplies Temper Spring Price Gains Blended cutout likely establishing seasonal peaks-- expected to erode into midsummer led by seasonal weakness in the end cuts, fat trim and more moderate erosion in middle meats Large futures discounts and strong basis support aggressive marketing pace and encourages buyer interest but, large out-front beef commitments difficult to sustain into late summer Prospects for a strongseasonal advance into late fall/winter 22
Seasonally Large Fed Cattle Supplies Weighing on Price Prospects Into Mid-Summer Large futures discounts and strong basis encouraging spot offerings amid potential late spring/early summer slaughter capacity issues But, premiums on fall LC futures may push some cattle forward in effort to alleviate capacity challenges Deferred LC premiums supporting FC, leading to wide feeder spreads Amid expectations for moderating fed beef supplies, boosting potential for fall rebound 23
vtransition to larger cattle inventory, growing calf crops and rising feeder cattle supplies well underway and will lead to larger beef output through 2019 and beyond veroding carryover stocks, growing feed usage, production uncertainty likely to limit weakness in feed costs vbesides larger beef output, large competing meat supplies will continue to weigh on beef prices, too vexpect exports to increase; imports to decline; but rising trade tension may hamper export growth; still, rising domestic supplies related to cyclical expansion in beef production vrisk remains that price rallies will prove disappointing and fall short of expectations, while price declines are extended and exceed expectations vfurther discussion: msands@nesvick.com; v Office: 901-766-8164; Cell 901-484-6757