US herd rebuild slowing

Herd rebuild slows in the US


Markets
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The US cattle inventory sits at 94.4 million head as at January 1, 2018 indicating that the expansionary phase that has been ongoing since 2014 may be coming to a close.

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The US cattle inventory sits at 94.4 million head as at January 1, 2018 indicating that the expansionary phase that has been ongoing since 2014 may be coming to a close.

The US cattle inventory sits at 94.4 million head as at January 1, 2018 indicating that the expansionary phase that has been ongoing since 2014 may be coming to a close.

LATEST information from USDA (US Department of Agriculture) has the US cattle inventory at 94.4 million head as at January 1, 2018.

While this is the largest cattle inventory since 2009, its rate of increase at just 0.7pc on the previous year is much lower than expected and indicates that the expansionary phase that has been ongoing since 2014 may be coming to a close.

Because the US at times is both Australia’s biggest customer and competitor in key markets, what flows from the US beef cycle will unavoidably impact the fortunes of the Australian industry.

As explained in a recent analysis by Steiner Consulting, the cow inventory number itself determines the calf crop and ultimately beef production from fed cattle.

In that regard the January 1, 2018 cow herd statistic of 41.2 million head (1.6pc higher than a year ago) implies further increase in the calf crop in 2018 and commensurate higher beef production in 2019.

However the more immediate calf crop figure as far as the market is concerned is the updated 2017 number.

It came in at 35.8 million head on January 1, 2pc higher than the previous year but importantly half a million head less than the initial estimate made by USDA in July last year.

Steiner believes this will result in lower-than-forecast beef production in 2018.

There was also an unexpected drop in the January 1 figures for the supply of feeder cattle outside feedlots which suggests lower placement rates in the next three months.

The market has responded to these revelations with a strong rally in fed cattle futures.

Lean beef production from cow slaughter is also a function of start-of-year inventory combined with the impact of weather conditions and overall profitability in the cow-calf producer sector.

Plenty of grass and strong margins have led herd expansion thus far but drought conditions across large parts of the Southern Plains and lower calf prices could be strong influences on producers when it comes time to decide whether to hold or sell cows.

Cow slaughter was up by 6.3pc in 2017 and Steiner’s ‘fair-weather’ prediction is for a further 4.4pc increase in 2018.

However if the drought worsens and consumer demand is insufficient to keep beef prices up (and thus calf prices) then Steiner believes cow slaughter could jump by as much as 11pc this year.

The other side of that coin is that good pasture conditions and robust beef demand could limit any increase in cow slaughter to only about 2pc.

Moisture conditions in northern-hemisphere spring (which is only a couple of weeks away) and early summer will be the key to the first part.

Until a week or so ago the consumer demand part of the equation might have been considered to be far more predictable than the weather.

December per capita expenditures, a proxy for beef demand, were up by more than 5pc on the previous year and that trend had been maintained throughout the year.

That in itself was a strong indicator for continuing growth in 2018 but then along came last week’s crash in the equities market.

If the stock-market rout deepens in coming weeks it could mean a fundamental deterioration in economic conditions which would very quickly change the demand outlook for beef.

Unfortunately the unavoidable conclusion from all of this is that there is no win win with the way the cycle is playing out.

Lower than expected production in the United States this year coupled with further strengthening in consumer demand may help to minimise the impact on Australia from the US as a competitor in export markets in 2018.

Drought breaking rain may even help to contain US domestic cow slaughter and keep some demand in play for imported lean beef in the short term.

But undoubtedly for the foreseeable future the US is going to be producing increased amounts of beef and the reality of that is competitive pressure in export markets and lessened demand for imports.

Australian processors are doing everything they can from a structural and technological perspective to lower their costs of production but ultimately it would seem that producers will have to accept the inevitability of a new normal for cattle prices.

Heat undoing rain benefit

IT must have happened before but I cannot recall seeing the state kill unaffected or actually increase as was the case last week after such a heavy and extensive rainfall event.

According to MLA, last week’s Queensland kill at 64,452 was 500 head higher than the week before.

The situation was the same in New South Wales where their tally of 33,719 was only one head different to the week before.

Victoria had another week in excess of 24,000 taking overall eastern states up slightly to 131,693.

This suggests some depth to supply but that is not really showing up in forward bookings.

One major processor I spoke to early in the week still had gaps in next week’s kill despite rates being upped by 10c/kg to 490c for indicator 4-tooth ox and 430c for heavy cow.

Also, the rain seems to have had little impact on the run of heavy feeder types coming out of the northern, central and western areas.

Given the peel back in feeder rates, it was thought that the rain might stem the flow and set up something of a supply pipeline of grassfed ox for later in the year.

All of this brings into question just how beneficial the early February rain has been.

Last week there was talk that some people were now set for the season irrespective of any further rain.

This week it seems that the heat has undone a lot of the benefit of the February rain and what is needed is a major monsoonal trough before the seasonal window of opportunity closes.

Without it, the second quarter looks set for a big run of slaughter cattle.

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