Live cattle futures finished the year down nearly 15%, after a volatile year of trading.
We believe that most of the negative news for cattle is already priced in, and cattle prices are near the bottom of the downward cycle.
Q1 2017: 114.0 cents a pound
Q2 2017: 111.0 cents a pound
Q3 2017: 110.0 cents a pound
Q4 2017: 112.0 cents a pound
Forecasts on quarter-average basis
Cattle prices are currently below the cost of production for cow-calf operators and are also hurting the profitability of feed yards.
The cow-calf operators continue to grow cattle outside feedlots longer due to healthy grazing pastures in the country.
However, average weight of cattle placed in feedlot during October 2016 declined for the first time since June 2015.
Cattle on feed at end-October were 1% lower than last year, as the total number of cattle placements in feedlots fell 5% year-on-year.
We believe that higher production costs and lower cattle prices will continue to result in a further decline in placement.
This should continue to lend support to live cattle prices despite high inventories.
However, we do not expect cattle prices to move sharply higher from current levels in the near term due to still-high inventories and slowly declining retail beef prices.
U.S. beef production reached a 22 year low in 2015, but is expected to increase from 25.1 billion pounds in 2016 to 26.2 billion pounds in 2017 due to the expansion in the cow herd that started in 2015 and the continuation of low feed prices.
Exports are expected to increase from 2.5 billion pounds in 2016 to 2.6 billion pounds in 2017 while imports are expected to decline from 3.0 to 2.7 billion pounds.
Domestic per capita beef supplies are projected at 56.6 pounds in 2017, up from 55.4 pounds in 2016 and 53.9 pounds in 2015. Fed cattle prices averaged near $148 in 2015 and about $120 in 2016, but are projected to average only about $105 in 2017.
US beef production is projected to grow by 4.5% to 5.0% in 2016, and another 2.5% to 3.0% in 2017.
The total US beef tonnage is driven up by a combination of genetic capabilities of the cattle, attractive feed grain prices, and the rising number of fed cattle sold on a formula basis- where feeders try to achieve better meat quality and, as a side effect of a longer feeding period, often also yield heavier animals.
Year-to-date US beef production totals have been comparable to the strong 2013 levels, while prices for various classes of cattle are trading down to the lows of 2010 and 2011.
By William Clarke