High cattle and beef prices look set to last till 2015: Column

By Gavin Maguire

CHICAGO, Jan 15 – Cattle and beef prices started 2014 at all-time highs, and a combination of strong money flow from the trading community, alongside a cutback in heifer slaughter rates by the ranchers, look set to help keep prices firm for several more months at least.

But the fact that ranchers are already rebuilding herds by holding heifers back from slaughter means a strong jump in the supply of both cattle and beef will emerge eventually, and it suggests prices have the potential to snap back hard once those supplies hit the market.

THE PATH OF LEAST RESISTANCE

After years of tight or negative production margins, cattle producers are finally seeing a windfall as cattle and beef prices scale all-time highs amid tight cattle and beef supplies as well as sharply lower feed prices.

Due to the slow rate of production expansion that is limited by the rate of calf and cow development, the good times for the meat sector look set to last for most of 2014 at least. Indeed, in the case of the beef market a fresh acceleration to the upside can’t be ruled out over the near to medium term as ranchers hold back heifers from slaughter in order to rebuild their herds.

However, because ranchers are already busy trying to ramp up cattle production, a big swell in cattle and beef supplies could emerge as early as the first quarter of 2015, so it is clear that this market’s good times can’t last forever.

TIGHT SUPPLIES, HIGH EFFICIENCY

The fact that U.S. cattle inventories are at their lowest levels since the 1950′s is a well known statistic, and is a chief factor underpinning both sentiment and price in the cattle market.

Less well known is the high level of production efficiency within the cattle industry that has allowed beef production to remain at relatively high levels through 2012 despite the steady drop in animal numbers. Improved genetics and advanced processing technologies have ensured that the amount of meat produced per slaughtered cow/bull has steadily risen over the past decade, and scaled a new high in 2012 just shy of 800 pounds per slaughtered animal.

That high level of beef output is expected to decline over the near to medium term, however, as fewer animals are slaughtered while ranchers rebuild their herds. Indeed, the amount of beef produced during the January-November period in 2013 was the lowest since 2005 – the year of the Mad Cow outbreak – and looks set to contract further in 2014 as heifer slaughter rates drop to their lowest level in 20 years.

Such a drop in beef output should fuel additional strength in beef prices, which are already at all-time highs in excess of $200 per hundredweight of choice beef on the wholesale market.

DEMAND EROSION?

Beef prices also remain high at the retail level, but stiff competition from other meat types has kept grocery store values in check lately. Relatively high stocks of beef in cold storage facilities as of late 2013 also suggests that retailers have some supply cushion built into their marketing channels that may allow them to absorb some additional price inflation over the immediate term.

However, meat processors and packers will have little choice but to pass on additional price gains to the end-customer if wholesale values continue to rise over the remainder of the year.

This will likely ensure that beef cuts remain the priciest in grocery store aisles this year, and could well spark a slowdown in demand growth if other meat options remain more attractively priced.

Still, from a rancher’s perspective the wholesale price will remain the key metric to track, and that should remain robust until supplies finally start to pick up in response to the ongoing rebuilding of cattle herds.

With heifer slaughter rates only showing a notable reduction in late 2013, it will take at least several more months before signs of growth in the overall U.S. cattle herd will be evident (due to the cow gestation lasting close to nine months before a calf is born).

After that, it takes roughly 14 months for a calf to reach slaughter weight, so it may take until well into 2015 before a notable swell in beef production materializes.

Still, due to the nature of futures markets, price corrections from the recent strength may occur months before the actual increases in cattle and beef supply take place. This means that ranchers and packers may see the current spell of price strength start to unravel ahead of 2015.

But for the time being, those engaged in the beef production industry look primed to see continued upbeat price signals for the next several months at least.

This outlook in turn has provided commodity traders with a compelling fundamental reason to invest in this market, and has resulted in the speculator community racking up their net position in live cattle futures to its highest level on record for this time of year.

Should the contraction in beef output in the coming months steer beef prices higher still, additional investor dollars can be expected to flow into this market until a rebound in beef output finally reverses that trend.

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