November 29, 2016
By John DePutter & Dave Milne, DePutter Publishing Ltd.
Times are tough in the beef business. North American producers certainly know that all too well. But while the here and now may be painful, it is also important to maintain some perspective – to understand just how we got to this point, and where history tells us things may go from here.
In today’s update, we want to take you on a quick tour of the past number of years, mostly using graphs and charts to better illustrate the ups and downs.
Many of these same charts and graphs formed part of the presentation that John DePutter, president and chief analyst of London, Ontario-based DePutter Publishing Ltd., provided to audiences on a western Canadian speaking tour earlier this month.
Tight supplies, high prices
The seeds of the big bull market that sent cattle prices to record highs that peaked in 2014 were sown for a number of years prior. As the chart below shows, the number of beef cows in the US herd began a multi-year decline in the mid-1990s, with the sharpest declines coinciding with the worst of the southern Plains drought, which lasted more than four years before finally being broken with severe flooding in the spring of 2015. In addition to the drought, massive U.S. herd liquidation was also sparked by skyrocketing grain prices that simply made it too expensive to raise and feed cattle profitably.
The decline from 1995 represented the longest-lasting uninterrupted liquidation phase in at least a century.
(Inventory reports are updated annually by the USDA. Last update was Jan 2016)
But as the law of supply and demand dictates, cattle prices had to start moving higher as the full impact of all the herd liquidation started to settle into the market. As prices did start to rise – hitting the bull market peak in 2014 – the pendulum began swinging the other way. Beef producers began holding back breeding stock from the kill line in order to expand their herds and cash in. As shown by the red bar above, the number of U.S. beef cows as of Jan. 1, 2016 numbered 30.3 million, up 4% from a year earlier, while the number of beef replacement heifers gained 3.3%.
The chart below also shows the effect of herd rebuilding, with the first annual increase in the American calf crop since the mid-1990s.
Canadian numbers still mostly flat
In contrast to their neighbours to the south, Canadian cattle producers have moved more cautiously on expansion. The weather has been a factor, with drought in the spring and early summer of 2015 dampening enthusiasm in Western Canada. The total number of cows in Canada has stopped declining but is not growing.
Other meats expanding as well as beef
It wasn’t just U.S. cattle producers who caught the recent expansion bug. Even as beef supplies were increasing, poultry and hog numbers were growing in response to declining grain prices.
The result is a record high total American meat supply, one that is giving consumers plenty of cheaper options in comparison to beef. In fact, retail beef prices have remained stubbornly high, with the bulk of the more recent price declines shouldered at the wholesale and farm level.
While it’s good news that beef is moving well without severe price cuts, the fact remains that beef prices would be higher if total meat production wasn’t surging to record heights, led by pork and poultry.
Three messages to remember
One primary message here is that the age-old drivers in the commodity world have been in play and remain in play. Low prices and lack of profitability cause production cuts and eventually, higher prices. Higher prices create incentives to produce more, which eventually sends prices back down again.
One corollary to that is that expensive grain leads to high livestock prices; cheap grain creates cheap livestock.
A third maxim is that a market extreme in one direction will tend to lead to a market extreme in the opposite direction. Indeed, we have seen an extreme in terms of a giant bull market and have endured the opposite extreme more recently.
So what’s next?
The bearish extreme – the crashing cattle market of 2016 – has probably bottomed. Regular readers of these posts may recall a list of potential bottoming indicators released a few weeks ago. Those indicators were valid. Most markets are into a noticeable bounce including futures, as pictured below. After dipping under US$95, the nearest future recently popped up over $110.
Hard to say how much it’s got in it, but from such depths as we saw a few weeks ago, it would not be surprising if there’s more firm or possibly higher action in the weeks ahead.
Let’s hope there are in fact better times soon.
Want to know more? Check out next week's article: Prices Up. How High Will They Get?
Previous post: Weak Prices but Beef Supply to Keep Rising
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