USDA forecasts the five-area steer price for 2014 will average $132 to $140 per hundredweight, up from 2013's record average of $125.89. As fed cattle supplies shrink in 2014, cattle prices should continue to climb. So will retail beef prices, which may well bring more consumer resistance to higher prices.
Packer margins are generally weak. Any resistance to high beef prices at retail will likely move downstream and limit what packers are willing to pay for cattle.
"Lower prices for 2013-crop feeds should improve feedlot margins," explains USDA economist Shayle Shagam. "But margins will face pressure as feedlot managers bid up to buy feeder cattle from a shrinking feeder cattle supply. Those forces will limit flexibility in price negotiations."
SLOWING PRICE HIKES: Tighter beef supplies will likely push retail prices higher. But price hikes may be smaller compared to the past several years. USDA projects 2014 retail choice beef prices to be about 2% to 3% above last year's record $5.29 per pound.
Expansion will be slow
The Jan. 1 beef cow herd was down about 1%, or 264,000 cows, from Jan. 1, 2013. Producers indicate they planned to retain 2% more heifers, or 90,000 heifers, for addition to the beef herd and expect to have 1% more heifers, or 39,000 heifers, calve during 2014.
Despite the expansionary signals, Shagam expects both the U.S. cattle inventory and beef cow herd to continue contracting during 2014. The biology of cattle implies that breeding decisions made this year will likely not result in a larger calf crop until at least 2015.
Returns to cow calf operators have been at levels that should encourage herd retention. However, many producers are taking a cautious view. They're rebuilding capital after a year or more of buying expensive forage. They want some certainty that sufficient supplies of own-forage and water will be available in those areas that experienced a year or more of drought before expanding in earnest.
In addition, current and expected calf prices will raise costs for those producers planning to expand herds by buying replacement calves. Pricy calves will cause other producers to balance the short-term returns of selling calves for finishing against the two year or longer benefits from retaining a heifer for breeding. Those forces have Shagam expecting to see aggregate cow numbers on Jan. 1, 2015 near this year's level.
Assuming that producers carry though their plans, supplies of cattle will remain tight this year and likely into 2015. To the extent producers hold back more heifers during 2014, supplies available for feeding will tighten further. It is unlikely that the size of the pool of cattle for feeding will support increased beef production before late 2016 or 2017.
Commercial beef production for 2014 is forecast to decline almost 6%, to about 24.4 billion pounds. Lower steer and heifer slaughter and continuing sharply lower cow slaughter will trim total commercial cattle slaughter by over 5%. Rising carcass weights will partly offset the decline in slaughter. Carcass weights are forecast to rise to almost 793 pounds as relatively low feed prices encourage feedlot operators to feed cattle to heavier weights.
Otte is farm management editor for Farm Futures magazine and a regular columnist for Beef Producer magazine.