Situation and Outlook: Calf and Yearling Prices

Prepared by the Livestock Market Information Center (LMIC)

From both an economic and a pasture/range resource perspective, national recovery from two years of drought will be a multi-year endeavor for the cattle industry. The 2011 drought caused national beef cow numbers to decline dramatically, led by herd liquidations in Texas and Oklahoma. This year’s drought decimated pasture/range in most of the U.S. and has damaged Midwest feed crops, dropping yields to the lowest in decades.

Cattle feeding losses were record large this summer. The result was a summer crash in calf prices. Still, in calendar year 2012, prices of all beef-type cattle are projected to set new record highs. Fed cattle prices over the calendar year will average about 7% above a year ago, while calf prices still increase about 10% despite the large summer declines. For 2012’s fourth quarter calf and yearling prices are expected continue to be under pressure and drop below 2011’s.

Looking ahead to calendar year 2013, additional gains are expected in fed cattle prices. Calf and yearling price patterns in 2013 may unfold quite differently than this year’s. If Mother Nature provides a more normal 2013, prices of calves and yearlings are expected to be highest in the second half of the year. For the first two quarters of 2013, calf and yearling prices are forecast to be below 2012’s. With increasingly tight cattle supplies, cow-calf returns will rebound once the drought subsides.

Declining Cattle Inventory

Mid-year cattle numbers provided by USDA’s National Agricultural Statistics Service showed that drought and feedstuff costs are reshaping the U.S. cattle sector. On July 20th USDA released the mid-year Cattle inventory count. That report, which gives a timely count on a range of categories from breeding cows to the size of this year’s calf crop, had been scheduled for elimination by USDA, but Congress stepped-in last fall maintaining it for this year. However, the future of this long-standing report remains uncertain.

Overall, the Cattle report showed more drought-induced whittling away of U.S. cattle numbers than expected during the first six months of this year. At 97.8 million head, the total of all cattle and calves was down 2.2% from a year ago. Nationally, both the beef and dairy cowherds were a little smaller than anticipated with a year-on-year decline in beef cows of 900,000 head and an unchanged dairy herd. Importantly, producers had reported an annual increase in the number of heifers held for beef cow replacements as of January 1, but by July 1 there was no year-on-year change; indicating drought had already adjusted producer plans. USDA’s first indication for the 2012 calf crop was 2.3% or over 800,000 head below 2011’s.

An often calculated statistic is the supply of feeder steers and heifers outside feedlots. That statistic has declined since July 1, 2008, but the rate of change has accelerated the last two years. As of July 1, 2012, the annual decline in the supply of steers and heifers outside Page 2

feedlots was 3.2% (down 1,184,000 head). Last year the mid-year drop was 2.5% (961,000 head).

All signs point to a smaller cowherd, again, as of January 1, 2013. Even though beef cow slaughter is below a year ago this year, levels have been large enough to indicate a herd decline. The number of heifers held for breeding herd replacement purposes remains below herd expansion norms. Even if normal pasture and range conditions return, it may take two more years to stem the cowherd decline and longer to post any significant growth.

Drought Crashes Calf Prices

In early 2012, the drought of 2011 was mostly subsiding in the Southern Plains and cattle numbers were tight. Additionally, U.S. consumer demand for beef was improving, exports of beef were moderating from a record 2011 but remained strong, and feedstuff costs were set to decline dramatically, especially for corn. On a quarterly average basis, prices of all cattle classes surged to all-time highs in the first quarter of 2012. The 5-area fed cattle price averaged over $125.00 per cwt., nearly 14% above 2011’s first quarter. In the Southern Plains, calf prices (500-to 600-pound) were over $180.00 per cwt. (up 22% from a year earlier) and yearlings (700- to 800-pound) were over $154.00 per cwt. (up 19% from 2011’s).

Then drought hit most of the nation. As of the end of July, USDA-NASS rated 57% of the U.S. pasture and range as poor or very poor (the two worst categories and essentially requiring significant supplemental feed or worse). At the same time last year, the massive Southern Plains centered drought resulted in a national poor and very poor rating of about 35%. Widespread deterioration in crop and pasture conditions made 2012 the worst U.S. drought since 1988.

With the 2012 drought, national average corn yield estimates have been reduced almost weekly. By mid-summer most estimates had corn yielding 20% below a year ago. So, as the second quarter of the year progressed drought turned from eroding to hammering calf prices. On a monthly average basis the 500-to 600-pound steer calf price in the Southern Plains crumbled from about $182.00 per cwt. in May to about $145.50 in July.

Feedlot closeouts flowed red ink and losses in that sector continued to build-up. In June and July, LMIC estimated losses for cattle feeders were record large and feedstuff costs were still increasing. By the end of July, year-on-year gains in calf and yearling prices had disappeared.

Without the drought of 2012, strong returns would have set the course toward the multi-year process of breeding herd expansion, but the economic picture is not so clear now. Since the early 1970’s the Livestock Marketing Information Center (LMIC) has estimated cow-calf returns over cash costs plus pasture rent based on typical production and marketing practices in the Southern Plains. Those estimates incorporate data and information provided by several USDA agencies. LMIC’s estimates are developed for market analysis purposes, actual cow-calf returns will vary considerably, even between neighbors. Over the last three months (May through July), massive drought has resulted in both crashing calf prices and surging costs of production for U.S. cow-calf operations causing estimated 2012 returns to plummet by about $100.00 per cow.

Outlook for this Fall

Fed cattle prices will rebound from the lows set this summer. Commercial cattle slaughter in the last quarter of 2012 is forecast 1% to 3% below a year ago, with both fed cattle and cow slaughter dropping. Slaughter steer prices are expected to remain well above a year ago for the balance of 2012. Look for fed cattle prices to generally strengthen as the fourth quarter progresses, and as was the case last year to set their annual high in that quarter.

Slaughter cow prices may not erode as much as normal in late 2012 as cow slaughter was pulled-ahead by drought.

The dominant influence on yearling markets this fall quarter will be corn and fed cattle prices. Even with rather high fed cattle prices, cattle feeding margins will likely remain in the red, keeping feeders cautious buyers of cattle. Southern Plains 700-to 800-pound steer prices this fall quarter may average slightly below recent levels, mostly in the upper $130’s per cwt. For the full calendar year, 700-to 800-pound steer prices will be about 9% above a year ago.

In terms of calf prices, three areas to watch over the near-term are: 1) the amount of drought damaged corn harvested for forage (green chop, silage, baled); 2) development of Southern Plains wheat and small grains pastures (moisture availability, planting progress and temperatures); and 3) prospects for fall/winter forages in states like California. Regionally and even nationally it is possible for calf prices to bottom quickly depending on forage conditions this fall. High cost-of-gain will make cattle feeders more interested in yearlings than freshly weaned animals. On a per cwt. basis, this fall Southern Plains calves could bring a very small premium compared to yearlings. In 2012’s fourth quarter, 500-to 600-pound steers are expected to average 5% to 7% below a year ago. In the Southern Plains that means average quality steer calf prices (500- to 600-pound) in the $140’s per cwt. For the year, calf prices are projected to average 9% to 10% over 2011’s.

Tight Supplies Indicate Higher Prices Longer-Term

Several big-picture drivers will decide how high beef and hence cattle prices go in 2013 and beyond. Will European financial problems drag the U.S into recession? How high will oil and corn prices be? Preliminary forecasts for 2013 assume continued very modest economic growth domestically and a slow-down worldwide. Importantly, normal U.S. feed grain production is assumed for 2013.

One aspect to highlight is international trade. In 2011, surging U.S. beef exports and declining imports were the drivers of record high cattle prices. In 2012, those factors were still a very important to cattle prices but beef export tonnage declined and imports increased. Still, U.S export tonnage in 2012 looks to be the second highest ever and the dollar value of beef industry exports (beef, variety meats, etc.) should be a new high. In 2013, the trends of this year will likely continue, so any beef demand improvement will need to come from the U.S. consumers not those overseas.

Beef cowherd liquidation has set the stage for beef production to tighten again in 2013. Supplies will remain very supportive of beef and cattle prices. The decline in U.S. production will be combined with rather stable beef exports and modest, if any, growth in poultry and pork output means, U.S. per capita availability of red meat and poultry in 2013 is forecast to decline further. In fact, calculated per person availability of red meat and poultry in 2013 is forecast to be the smallest since 1987.

Corn carry-over stocks will be tight at least until 2013 crops are harvested. Grain prices are expected remain quite volatile, causing potentially large price swings in calf and yearling prices. But price swings could provide opportunities for producers with sound business and risk management plans to purchase calves and sell yearlings. In the next few years, opportunities to make money putting pasture-based weight gains on calves should continue.

Preliminary 2013 forecasts put the slaughter steer price 2% to 6% above 2012’s. The strongest fed cattle prices of the year are forecast to be in the second and fourth quarters, similar to the normal seasonal pattern. For the first time ever, quarterly fed cattle prices are forecast to be over $120.00 throughout the year.

In the Southern Plains, forecasts call for yearling and calf prices in 2013 to post a small annual increase. High feedstuff prices make it nearly impossible to match levels posted in the

first half of 2012. Over the calendar year, the weakest yearling prices could be in the first quarter of 2013, again assuming a normal growing season next spring/summer. For the year, 700-to 800-pound steers in the Southern Plains are forecast to average in the high $140’s per cwt. and by the fourth quarter could easily be $10.00 per cwt. above 2012’s. That would put late 2013 Southern Plains yearlings mostly in the $146.00 to $153.00 per cwt. range.

Calf prices should post year-on-year declines throughout the first half of 2013. But in the second half of the year prices could begin rising above 2012’s. In fact, calf prices in the fall quarter of the year are expected to be well above 2012’s and if Mother Nature cooperates could eclipse 2011’s record high.