Record Prices but Negative Margins

Pasture and range prospects continue to improve in those areas of the South that have received precipitation over the last several weeks, some getting as much as 200 percent of normal December precipitation.  In the short run, the precipitation will help wheat pasture when it begins to grow in February.  With some followup precipitation, precipitation this fall and winter will set the stage for year-over-year improvement in conditions over those observed from October 2010 through March 2011 and will help native pastures begin to grow or recover this spring.  The La Niña effect is expected to continue at least into spring of 2012, however, and could affect precipitation patterns in 2012 as it did in 2011.

Cumulative weekly federally inspected “other” cow slaughter--mostly beef cows- through the week of December 31, 2011 was almost 5 percent above the same period a year earlier, and was over 14 percent above same period in 2009.  Total annual commercial cow slaughter has been observed at current levels only one time since 1987—in 1996, also a drought year.  Commercial cow slaughter in 2011 is on track to equal around 17 percent of the January 1, 2011 cow inventory compared with 14.9 percent of the January 1, 1987 cow inventory and 16.3 percent of January 1, 1996.  

USDA’s National Agricultural Statistics Service (NASS) semi-annual Cattle inventory report to be released on January 27, 2012, will provide analysts a better idea of the effect the drought has had on the national cow herd and replacement heifer inventories.  However, ahead of the report, the atypically large cow slaughter relative to the January 1, 2011, cow inventory has fueled expectations for an overall year-over-year decline in beef cow inventories, especially in Southern States, and a likely decline in heifer inventories as well.  Despite these expectations, it is important to keep in mind that the drought affected an area accounting for roughly 40 percent of the national beef cow inventory.  For the most part, the other 60 percent of beef cows in the United States enjoyed average or better pasture conditions, and adjustments to their cow inventories could offset to some extent what happened in the South.

Despite the most severe drought in recorded Texas history, record-high corn prices throughout 2011 and recent rains have supported feeder cattle prices, producing several records and pushing some lighter weight feeder cattle prices to $200 or more per cwt.  Increasing prices for feeder heifers throughout 2011 reflect both increased interest in placements in feedlots and in cow herd rebuilding.  Interest in heifers has increased considerably in the last few weeks as drought-affected producers begin thinking about restocking and others begin to expand their cow herds.  Calves from any heifers retained for breeding in 2012 will not be ready for slaughter until sometime in 2014 or later.  Producers’ resolve to retain heifers to increase cow herds could likely be tested as heifer prices rise in the face of increasing demand for feeder cattle over the next few years. Net placements of feeder cattle in feedlots of 1,000 head or more through November 2011 averaged 2 percent higher than the 2010 average.

Net placements in 2010 averaged over 5 percent higher than 2009 placements.  While the placements in 2011 were largely drought-induced, placements in both4
Livestock, Dairy, and Livestock Outlook/LDP-M-211/January 19, 2012 Economic Research Service, USDA 2010 and 2011 were from successively smaller calf crops.  This generally means calves were “pulled forward” for placement in feedlots; that is, they were placed at lower weights and/or at younger ages than would ideally have been the case.  The fact that average annual estimated placement weights have declined since 2008 is consistent with the notion of placing cattle earlier and/or at lighter weights.

Increasing net placements and reducing placement weights are in opposition with respect to total beef production because lighter weight placements generally are marketed at lighter finished weights.  The result is more beef from more cattle, but less beef from each animal.  Other factors also affect total beef production, including the proportion of heifers in the slaughter mix (more of which decreases average dressed weights); cow slaughter (more of which tends to lower average dressed weights of all cattle while increasing total beef production); bull slaughter (which tends to increase dressed weights and total beef production); and feeding activity in feedlots of less than 1,000-head capacity (more of which increases fed beef and total beef production).

November marketings of fed cattle from 1,000-plus-head feedlots were less than 1 percent below year-earlier marketings.  However, marketings for all of 2011 are likely to exceed 2010’s marketings.  Further, based on the large placements of lightweight calves in 2011, marketings for much of the first half of 2012 are expected to exceed those of first-half 2011.  Heavy marketings during the first half of 2012 could also result in some downward pressure on fed cattle prices, although anticipation of smaller marketings later in 2012 will likely keep declines from being sharp.  The outlook for steer and heifer prices is slightly more bullish for the second half of 2012 and beyond, as second-half 2012 slaughter is expected to be lower than second-half 2011 slaughter.  Activities in feedlots of less than 1,000 head could alter this scenario.  Some insight into this situation will also be reflected in the total cattle on feed number in this January’s NASS Cattle inventory report. Wholesale beef cutout values have been on a roller coaster for much of the year. 
While cutout values in 2011 have been at levels well above both 2010 levels and the 3-year average, except for a period in March and again during late May through September, packers have been unable to maintain sufficient pressure on cattle feeders to lower fed cattle prices enough to widen wholesale margins.  Despite record retail prices, packers have also been unable to pass enough of the higher prices through to retailers to keep average packer margins in the black.  Retail prices in 2012 are expected to surpass 2011 prices, but by how much will depend on the economic recovery, beef imports, and prices for pork and poultry.   

Source: USDA