Beef & Cattle Market Outlook

Beef & Cattle Market Outlook Glynn Tonsor Dept. of Agricultural Economics Kansas State University www.agmanager.info 1

FEEDSTUFFS: OVERVIEW Expensive forage; drought triggering liquidations; corn price volatility SUPPLY: Historically tight supplies (s.r. vs. l.r. drought points) Shrinking cow herd, expansion uncertainty Structural changes underway DEMAND: Export demand remains strong Domestic demand surpassing expectations 2

July 11: 40% of Beef Cows in States with > 40% Poor to Very Poor Pasture Conditions (was 4% in 2010) 3

BEEF COW SLAUGHTER Federally Inspected, Weekly Thou. Head 90 85 80 Avg. 2005-09 75 70 2010 65 60 55 50 2011 45 JAN APR JUL OCT Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS C-S-34 08/12/11 4

SLAUGHTER COW PRICES Southern Plains, 85-90% Lean, Weekly $ Per Cwt. 85 80 75 70 65 60 55 50 45 40 JAN APR JUL OCT Avg. 2005-09 2010 2011 Livestock Marketing Information Center Data Source: USDA-AMS C-P-35 08/15/11 5

CALF CROP July 1 Estimates, U.S., Annual Mil. Head 45 2011 = 35.5 Million Head -0.5 Percent 43 41 39 37 35 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Livestock Marketing Information Center C-N-18B 07/22/11 Data Source: USDA-NASS 6

Will national herd expand by 2014??? -- who & where will expansion occur??? Mil. Head 7 HEIFERS HELD AS BEEF COW REPLACEMENTS July 1, U.S. 6 5-4.5 % 4 3 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Livestock Marketing Information Center Data Source: USDA-NASS C-N-37 07/22/11 7

Pre-Report Estimates: On Feed Aug 1 (up 7.5%) {3.8% to 9.2%} Placed in July (up 16.9%) {6.4% to 26.6%} CATTLE ON FEED US Total, Monthly Mil. Head 12.0 11.5 Avg. 2005-2009 11.0 2010 10.5 10.0 2011 9.5 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Livestock Marketing Information Center Data Source: USDA-NASS C-N-10 07/22/11 8

KANSAS FEEDLOT CLOSEOUTS Final Weight, Steers Pounds 1400 1380 1360 1340 1320 Avg. 2005/ 09 2010 1300 1280 2011 1260 1240 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 9

Value 2000 1800 1600 1400 1200 1000 NATIONAL RESTAURANT NEWS STOCK MARKET INDEX Weekly Avg. 2005-09 2010 2011 800 JAN APR JUL OCT Livestock Marketing Information Center Data Source: National Restaurant News, Compiled & Analysis by LMIC 08/02/11 10

CPI - MEATS 1982-1984 Base, Monthly Index 230 225 220 215 210 205 200 Avg. 2005-09 2010 2011 195 190 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Livestock Marketing Information Center Data Source: Bureau of Labor Statistics 07/15/11 11

Demand Index (1980=100) 100 90 80 70 60 50 40 30 20 10 100 95 88 87 84 Annual, Choice Beef Demand Index (1980=100) 80 77 69 68 64 63 61 58 56 55 54 Actual Quantity & Price Changes: 1980: 76.6 lbs (per capita cons); $2.83 (real choice price) 2010: 59.6 lbs (per capita cons); $2.01 (real choice price) 52 50 50 52 52 54 54 56 61 58 55 56 53 51 51 Year-over-Year increases since Q3 of 10 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 Year Source: Glynn T. Tonsor, Kansas State University, Jan. 2011 12

U S BEEF AND VEAL EXPORTS As a Percentage of Production, Carcass Weight, Annual Percent 10 8 6 4 2 0 1987 1990 1993 1996 1999 2002 2005 2008 2011 Livestock Marketing Information Center Data Source: USDA-ERS & USDA-FAS, Compiled & Analysis by LMIC I-N-07 07/26/11 13

STEER HIDE AND OFFAL VALUE Live Animal Basis, Weekly $ Per Cwt. 14.50 13.50 12.50 11.50 10.50 9.50 8.50 Avg. 2005-09 2010 2011 7.50 JAN APR JUL OCT Livestock Marketing Information Center Data Source: USDA-AMS C-P-39 08/15/11 14

MED. & LRG. #1 STEER CALF PRICES 400-500 Pounds, Southern Plains, Weekly $ Per Cwt. 175 165 155 145 Avg. 2005-09 2010 135 125 2011 115 JAN APR JUL OCT Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC C-P-49A 08/15/11 15

MED. & LRG. #1 FEEDER STEER PRICES 700-800 Pounds, Southern Plains, Weekly $ Per Cwt. 150 140 130 120 Avg. 2005-09 2010 110 100 2011 90 JAN APR JUL OCT Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC C-P-49 08/15/11 16

SLAUGHTER STEER PRICES 5 Market Weighted Average, Weekly $ Per Cwt. 125 120 115 110 105 100 95 90 85 80 JAN APR JUL OCT Avg. 2005-09 2010 2011 Livestock Marketing Information Center Data Source: USDA-AMS 17

$ Per Cow COW-CALF RETURNS AND CATTLE INVENTORY U.S., Annual Mil. Head 150 100 115 110 Cow-Calf Returns 50 105 0-50 100 95 Cattle Inventory Jan 1-100 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 90 Livestock Marketing Information Center Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC C-P-67 07/26/11 18

Kevin Dhuyvetter s Buy-Sell spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) 8/18/11 Salina, KS Situation: Basis.com forecasted price of 800 lb steer 1991-2010 Average March 1, 2012 is $134.11/cwt What is break-even purchase price of a 500 lb steer purchased on October 1, 2011? forecasted price is $151.67 19

Kevin Dhuyvetter s Buy-Sell spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) Breakeven Buying Price Worksheet Selling weight after shrink (pay-weight) 800 Expected selling price ($/cwt) $134.11 Average Daily Gain (pay-to-pay) 2.00 Feeding cost of gain ($/cwt) $70.00 Interest rate on feeder 8.00% Percent death loss* 2.00% Costs per head (trucking, etc.)** $10.00 Desired profit per head $0.00 * Enter ONLY if death loss is NOT included in feeding cost of gain, otherwise enter zero. ** Do not enter any costs included in feeding cost of gain. 20

Kevin Dhuyvetter s Buy-Sell spreadsheet tool (http://www.agmanager.info/livestock/budgets/production/beef/cattlebuysell.swf) Selling Price Purchase $128.11 $130.11 $132.11 $134.11 $136.11 $138.11 $140.11 Weight 1 Breakeven Purchase Price 2 450 161.77 165.13 168.49 171.84 175.20 178.55 181.91 500 153.39 156.42 159.46 162.50 165.53 168.57 171.60 550 146.57 149.34 152.12 154.89 157.67 160.44 163.22 600 140.92 143.48 146.04 148.59 151.15 153.71 156.27 650 136.18 138.55 140.93 143.30 145.67 148.05 150.42 700 132.15 134.37 136.58 138.80 141.02 143.23 145.45 750 128.69 130.77 132.85 134.93 137.01 139.09 141.17 1 Enter the minimum purchase weight you are willing to consider. 2 Based on a feeding cost of gain of $70/cwt. Expected Sales Price: $134.11/cwt: Expected Return: $54.15/head [5.0 * ($162.50-$151.67)] 21

$ Per Cwt 135 CHOICE STEER PRICE vs BREAKEVEN Cattle Feeding, S. Plains, Monthly 125 115 105 95 Steer Price Breakeven 85 75 Latest Data: July 2011 Projected Breakeven 65 2003 2004 2005 2006 2007 2008 2009 2010 2011 Livestock Marketing Information Center C-P-21 08/01/11 Data Source: USDA-AMS & USDA-NASS, Compiled & Analysis by LMIC 22

As of: 8/2/11 23

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QUARTERLY FORECASTS (LMIC: 7/26/11) % Chg. Average % Chg. Comm'l % Chg. Year Comm'l from Dressed from Beef from Quarter Slaughter Year Ago Weight Year Ago Production Year Ago 2010 I 8,164 2.4 765.4-2.3 6,248 0.0 II 8,680 0.9 754.2-1.7 6,547-0.8 III 8,752 2.7 773.4-1.5 6,768 1.2 IV 8,654 5.0 779.0-0.1 6,741 4.9 Year 34,249 2.7 768.0-1.4 26,304 1.3 2011 I 8,317 1.9 770.9 0.7 6,411 2.6 II 8,639-0.5 759.2 0.7 6,559 0.2 III 8,740-0.1 783.4 1.3 6,847 1.2 IV 8,065-6.8 785.9 0.9 6,338-6.0 Year 33,761-1.4 774.7 0.9 26,155-0.6 2012 I 7,894-5.1 780.5 1.2 6,161-3.9 II 8,154-5.6 767.2 1.1 6,256-4.6 III 8,264-5.4 792.4 1.1 6,548-4.4 IV 7,830-2.9 792.3 0.8 6,204-2.1 Year 32,142-4.8 783.1 1.1 25,169-3.8 25

QUARTERLY FORECASTS (LMIC: 7/26/11) Live Sltr. % Chg. Feeder Steer Price Year Steer Price from Southern Plains Quarter 5-Mkt Avg Year Ago 7-800# 5-600# 2010 I 89.44 8.8 100.88 116.23 II 96.33 14.0 113.04 127.77 III 95.47 15.0 115.12 124.10 IV 100.28 20.4 114.52 123.26 Year 95.38 14.7 110.89 122.84 2011 I 110.12 23.1 129.06 150.07 II 112.79 17.1 132.03 148.61 III 107-110 13.6 135-139 138-143 IV 112-116 13.7 130-135 136-141 Year 110-113 16.8 131-134 142-147 2012 I 114-119 5.8 126-132 139-146 II 116-122 5.5 130-137 144-153 III 112-119 6.5 133-141 146-156 IV 115-123 4.4 127-137 140-152 Year 115-120 5.4 129-137 142-152 26

Looking Beyond Today s Ps & Qs 27

Beef industry changes underway Sales value of cull cows is about = for all Those with higher costs, opportunities to row crop, etc. may increasingly exit Expansion will not come from those with higher costs and notable alternative opportunities BEEF Magazine Poll (N=99 as of 8/17) If you had to liquidate cattle this year because of flooding or drought, what do you plan to do with the proceeds? 47% Restock with cows when conditions improve 9% Restock but change production models (e.g., buy stockers rather than cows) 27% Keep the cash; leave the business 6% Reinvest the cash in another non-livestock ag enterprise 10% Don t know 28

Beef industry changes underway Expansion of stocker segment continues KS feedlot closeout trends: Increasing final weights, ADG, & Feeding costs Decreasing DOF & Feed-to-Gain Overall movement to more forage based gain = opportunity for cow-calf/stockers with associated comparative advantages 29

Demand Side Issues & Trends Long run decline in domestic (per capita) meat consumption 2018 poultry consumption > (beef + pork) Poultry grows every year from 2011-2020 Global growth likely to exceed domestic Heightens industry fragmentation issues such as animal ID/traceability, marketing arrangements, etc. outside factors increasingly important for beef MCOOL, animal welfare, etc. will directly impact industry 30

Policy/Regulation Issues & Trends GIPSA fair market proposed rules / anticompetition listening sessions No timetable on USDA s ben.-cost assessment environmental regulation concerns WTO MCOOL ruling in fall of 2011? animal welfare/mandatory labeling? Is overall uncertainty holding back investment throughout supply chain??? 31

Ending thought Beef-cattle industry is facing increasing volatility and uncertainty while also being asked to do more with less Increased risk may signal opportunity and higher average returns within industry variations in views and comparative advantages will determine the ability to profit and shape future of industry 32

More information available at: AgManager (http://www.agmanager.info/) Glynn T. Tonsor Assistant Professor Dept. of Agricultural Economics Kansas State University gtt@agecon.ksu.edu www.agmanager.info 33

Notable AgManager Resources (http://www.agmanager.info/livestock/marketing/ ) Weekly commentary & newsletters Current & historical price information Risk management/forecasting tools 34

Weekly Email Distribution of AgManager Updates http://listserv.ksu.edu/web?subed1=agm ANAGERUPDATE&A=1 OR email your request to: Rich Llewelyn [rllewely@agecon.ksu.edu] 35

Regular Newsletters & Commentary KSU Radio Interview (http://www.agmanager.info/livestock/marketing/outlook/newsletters/default.asp) OR (http://www.ksre.k-state.edu/news/desktopdefault.aspx?tabid=66 ) Weekly, released on Mondays (Tonsor, Mark, Peel, LMIC) In the Cattle Markets (http://www.lmic.info/memberspublic/inthecattlemarket/cattlemktsframe.html ) Weekly (Mark, Feuz, Petry, Riley/Anderson) Recent Cattle Finishing Returns (http://www.agmanager.info/livestock/marketing/outlook/newsletters/finishingreturns/default.asp ); monthly updates based on Focus on Feedlots newsletter 36

Regular Situation Update Commentary: LMIC Chart of the Week (http://www.lmic.info/index.shtml) Weekly Price & Production Summary (http://www.lmic.info/priprod/pandp.html) Quick Market Reports (http://www.lmic.info/quick/quickdr.html) 37

Current Price & Basis Information Futures Markets (http://www.cmegroup.com/trading/commodities/ ) OR (http://www.agmanager.info/livestock/marketing/futures/default.asp ) LC, FC, LH & C, SB, S, W Cash Markets http://www.agmanager.info/livestock/marketing/graphs/default.asp#price Charts http://www.agmanager.info/livestock/marketing/database/default.asp#cattle and Beef Databases Dodge City, Pratt, & Salina 700-800 lb steer; KS Direct Slaughter steer prices Basis (Cash - Futures) Information http://www.agmanager.info/livestock/marketing/graphs/default.asp#basis Charts BeefBasis.com (http://www.beefbasis.com/ ) 38

Risk Management and Return Forecasting Tools Available: Feeder Cattle Sales Risk Management Tool, Compare expected sales prices of alternative FC marketing strategies (http://www.agmanager.info/livestock/marketing/lrp/default.asp) Feedlot Profitability Tool: NAIBER s Feeding Risk Analyzer Forecasts feedlot returns and variability in returns for future placements (http://www.naiber.org/cattleriskanalyzer/ ) BeefBasis.com Decision support for hedging feeder cattle (output for cow-calf; input for feedlots) (http://www.beefbasis.com/home/tabid/53/default.aspx) 39

Other References of Interest: March 11 ERS Report on Cow-Calf Industry http://www.ers.usda.gov/publications/eib73/ Beef Demand Information Journal articles, fact sheet, annual & quarterly demand indices http://www.agmanager.info/livestock/marketing/beef%20demand/default.asp Animal Well-Being Information Journal articles, fact sheets, and short video summaries http://www.agmanager.info/livestock/marketing/animalwelfare/default.asp Animal Identification & Traceability Information Journal articles, fact sheets, and short video summaries http://www.agmanager.info/livestock/marketing/animalid/default.asp 40

KANSAS FEEDLOT CLOSEOUTS Final Weight, Steers Pounds 1400 1380 1360 1340 1320 Avg. 2005/ 09 2010 1300 1280 2011 1260 1240 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 41

KANSAS FEEDLOT CLOSEOUTS Avg. Days on Feed, Steers Days 175 170 165 160 155 Avg. 2005/ 09 2010 150 145 2011 140 135 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 42

KANSAS FEEDLOT CLOSEOUTS Avg. Daily Gain, Steers Pounds 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg. 2005/ 09 2010 2011 Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 43

Pounds 6.6 6.5 6.4 6.3 6.2 6.1 6.0 5.9 5.8 5.7 KANSAS FEEDLOT CLOSEOUTS Pounds of Feed (Dry Basis) Per Pound of Gain, Steers Avg. 2005/ 09 2010 2011 5.6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 44

KANSAS FEEDLOT CLOSEOUTS Feeding Costs per Cwt, Steers $/cwt 100 95 90 85 Avg. 2005/ 09 2010 80 75 2011 70 65 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data Source: KSU Focus on Feedlots, Compiled by LMIC 08/01/11 45

TOTAL CATTLE NUMBERS JANUARY 1, 2011 (1000 Head) 5150 Alaska Hawaii 1090 1330 US Total 460 14 141 2500 1700 2380 1230 1020 1630 NH 34 MA 40 RI 5 CT 49 NJ 32 DE 18 3450 2200 3700 1400 1300 1090 3900 1610 6200 1230 1100 850 800 MD 195 2650 370 6300 1540 3950 2190 780 1990 870 5100 1540 1720 385 92582 13300 790 900 VT 270 90 2,400 to 13,300 (11) 1,300 to 2,400 (13) 500 to 1,300 (12) 0 to 500 (14) Livestock Marketing Information Center Data Source: USDA/NASS C-N-23 01/28/11 46

CHANGE IN TOTAL CATTLE NUMBERS 2010-2011 (1000 Head) 50-50 -20 70-40 50 30-100 -20-10 50 10-100 -70-20 -50-10 50 0 300-200 -110 0-50 -60-20 -400-190 -50-40 Alaska -1-80 0 Hawaii -10-50 US Total -1299-10 -10-10 -40 5-90 5-3 3 CT 1 NJ -4 DE -2 MD 0 MA -3 RI 0.2-1 to 300 (18) -4 to -1 (4) -40 to -4 (13) -400 to -40 (15) Livestock Marketing Information Center Data Source: USDA/NASS C-N-14 01/28/11 47

CHANGE IN BEEF COW NUMBERS JANUARY 1, 2010 TO JANUARY 1, 2011 (1000 Head) 6 3 0-10 Alaska -0 Hawaii -2 11 11-20 5 6-8 0 3-45 -9 2-37 -8-3 13 10 44-103 -47-7 -28-37 -14-9 1-8 -10-20 -115-38 US Total -506-32 0-3 10-16 0-1 2 MA -2 RI 0 CT -2 NJ -1 DE -1 MD 1 2 to 44 (13) 0 to 2 (7) -10 to 0 (17) -115 to -10 (13) Livestock Marketing Information Center Data Source: USDA/NASS C-N-28 01/28/11 48

CHANGE IN BEEF COW NUMBERS JANUARY 1, 2002 TO JANUARY 1, 2011 (1000 Head) -20 5-128 -40-56 35 15-47 -193-121 28-145 5-3 -160-93 -13 10-24 -70 1-15 -26-195 -52-160 -83-70 -5-12 100 1-26 -81-91 -92 Alaska 1-410 Hawaii 1-5 US Total -2269-32 -2-1 3 MA -1 RI 0 CT -4 NJ 1 DE -1 MD 1 3 to 100 (8) -12 to 3 (16) -70 to -12 (13) -410 to -70 (13) Livestock Marketing Information Center Data Source: USDA/NASS C-N-29 01/28/11 49