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Beef cow herd growth likely to continue

 

University of Kentucky College of Agriculture, Food and Environment

 

LEXINGTON, Ky. - USDA released their mid-year cattle inventory report in late July. This report estimated the number of cattle in the United States as of July 1, 2017. This mid-year report was not conducted last year due to budgetary constraints, so year-over-year comparisons are not possible. Rather, July 2017 estimates are compared to July 2015. While state-by-state numbers are not estimated mid-year, the report did confirm significant expansion of the beef herd over the last 24 months at the national level and was largely consistent with what was seen in the January inventory report.


As expected, beef cow numbers were up about 7% over the last two years. It is well established that this herd has grown rapidly since 2015. This was partially in response to extremely high calf prices in 2014 and 2015 and also because weather has been favorable. This general expansion can been seen across the board in the report as one looks at breeding stock, cattle on feed, and the size of the calf crop. The one number that looks odd is the 2% decrease in heifers held for beef cow replacement, and I thought it might be worth looking into that a bit more.


First, we have to remember that this is making a two-year comparison, rather than the single-year comparison that we are used to seeing. Second, we have to consider the base year, which in this case was 2015. On July 1, 2015, USDA estimated there were 4,800 heifers being held for beef cow replacement, which was the largest beef cow replacement number since 2006. So, we are comparing the 2017 number to a very large 2015 number. Remember how strong calf prices were in the summer of 2015 and how intense the interest in expansion was that year.


Another way that I like to look at beef heifer retention is to consider it as a percent of beef cow inventory. Beef heifer retention at mid-year, as a percent of beef cow inventory, was above 15% in both 2014 and 2015 (remember there was not a mid-year 2016 report). Clearly, both of these were expansion years. Beef heifer retention as a percentage of beef cow inventory was 14.5% in July 2017. While less than what was seen in 2014 and 2015, this is still not a small number. In fact, with the exception of 2014 and 2015, we would have to again go back to 2006 to find a larger percentage than the 14.5% seen this year. So, it is very likely that the growth rate of the U.S. beef herd is slowing, but I do think it is still growing.

 

As always, it is good to think about implications on calf markets, which have been a reall roller coaster ride over the last several years. Auction prices for 550-pound steer calves have dropped by more than $10 per cwt since June and are very close to 2016 levels. Given spring CME Feeder Cattle futures, there is likely still room for calf prices to drop between now and fall. Fortunately, under current market conditions, I don't think calf prices are likely to get near as low as they did last fall. I am expecting a fall calf market between current prices and what was seen in the fall of 2016.

 

As we start thinking about next year, I am working from an expectation that the U.S. beef herd will be 1% larger on Jan. 1, 2018. Due to the more rapid expansion of the cowherd in previous years, beef production will be up by more than that next year. Plus, USDA is forecasting increases in pork and poultry production. Given those expectations, calf prices are very likely to be lower in 2018 than in 2017 as we compare fall-over-fall. So, I still think cow-calf operators have some challenges on the horizon.

 

In a market environment where little returns are being seen, and the expectation is for things to get worse before they get better, having a solid understanding of costs is important. It is very likely that some producers are profitable in this environment, while many others are not. Making sound decisions starts with knowing where you are on that spectrum. Profitable producers may well view times like this as an opportunity to expand, while many others may be looking to reduce the size of their herds. Regardless, all producers should have a solid understnading of their cost structure in order to make sound management decisions.

 


This article was written by Kenneth H. Burdine, a UK Extension Professor for Livestock Marketing and Management. The article first appeared in the August 2017 edition of the Center for Crop Diversification newsletter.