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Tighter Cattle Supplies Will Boost 2020 Prices

Mother Nature threw enough obstacles at ranching in 2019 to discourage even the most hardened of cowboys. They responded by sending more heifers and cows to slaughter than expected, which has given analysts reason for optimism in 2020.   

“Broadly speaking, 2020 is shaping up to be better than 2019 for cattle prices,” says Kansas State University livestock economist Glynn Tonsor. “The main drivers would be that we are slowing down the volume of production of animals in the system, and there’s some optimism that feed costs will be supportive and trade will hold its own if not improve.”   

Notably, through the end of November, heifer slaughter in 2019 was more than 7% higher than the same period a year earlier and beef cow slaughter was 3% higher. That suggests fewer beef cows will calve in 2020 and supplies of feeder cattle will decline.

“It looks like we’re going to have a smaller cow herd come Jan. 1,” says University of Tennessee livestock economist Andrew Griffith. “I expect it’s going to be a lot smaller than what would have been predicted six months ago.”

The reason? “I think what finally happened is prices just convinced people not to retain those heifers. There’s not a lot of ranchers making money at the price we’ve seen for calves this fall,” Griffith says.

The reduction in cow numbers, however, might produce a significant positive influence on prices. Sterling Marketing president John Nalivka says cow culling reduced both beef and dairy cow herds by 3% in 2019, which is the fifth consecutive year of increased cow slaughter.

“The beef cow slaughter in 2019 will be the highest slaughter relative to the overall herd since 2013,” Nalivka says. “And the dairy cow slaughter relative to the overall dairy herd will be the highest since 1977.”

While producers deeply culled their herds in 2019, Nalivka says they retained significantly fewer heifers from the 2018 calf crop for herd replacements. “Consequently, I am projecting a 1% decline in the size of the U.S. cattle inventory at the beginning of 2020 compared to Jan. 1, 2019.”

Other analysts see the same heifer trend. A recent Livestock Marketing Information Center (LMIC) newsletter notes, “Heifer slaughter is on pace to be about half a million head more than it was in the ‘other heifer’ category in the Jan. 1, 2019 report. That would indicate more heifers that were considered for replacement were pulled from the herd.”

LMIC also noted the Nov. 1, 2019, cattle on feed report found 39% of the on-feed mix were heifers. “This suggests the number of heifers held for replacement for beef-type animals will also likely be below a year ago. LMIC is penciling in beef heifer replacements to be down more than 2% (in the Jan. 1 inventory report).”

In addition to less domestic production in 2020, Nalivka projects a 6% decline in beef imports.

“That’s the result of the major countries we buy beef from now sending beef to China,” Nalivka says. That beef originates from Australia, New Zealand and South America, and the Chinese demand for more beef is due to its lost pork production from African Swine Fever (ASF).

Tighter supplies should drive up prices.

Bullish attitudes for 2020 cattle markets hinge on the realization of tighter supplies, analysts say.

“We’re projecting October calves weighing 550 lb. in the upper $160s to low $170s,” Tonsor says. “That would be $10 better than 2019. The main driver is cheaper grain, which would lead feedlots to chase calves.”

Nalivka sees a similar trend.

“I forecast prices for calves and yearlings in 2020 to be 3% to 5% higher, he says.

Nalivka’s projections are built on a slightly different model than Tonsor’s – Oklahoma City steer calves weighing 550 lb. – but translate to the same $10 per cwt. increase.

“The October 2019, Oklahoma City average for 550 lbs. steers was $150.91,” Nalivka says. “I project those same steers at $160 next October, with the heifer mates at $150 per cwt.”

For fed cattle, Nalivka projects a 3% increase to annual average prices to $120. On a quarterly basis, he projects first quarter fed steer prices at $122.67, which would be $2.50 lower than 2019. Projections for the remaining quarters of 2020 are $121.67, $115.67 and $120.33, respectively.

Strong beef demand should keep pace.

While much of the price optimism for 2020 centers on tighter supplies, Tonsor and Nalivka both acknowledge beef demand has been strong and they expect that to continue.

“There’s more uncertainty around demand in 2020 than there has been for several years,” Tonsor says. “Depending on what economists you ask, you might get comments about a recession in 2020, and if that happens then that is definitely bearish for beef demand.”

But the 800-lb. gorilla in the conversation about beef demand is ASF, Tonsor says.

“Even though it’s a pork disease, it still impacts all proteins,” he says. “I’m convinced the global demand for protein is going to grow, the global population is growing and many people are trying to upgrade their protein options. That’s positive for beef demand.”

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