Live cattle prices have increased 525% since 2022. Many in the industry are now afraid of the market, fearing that the top is near. For producers this concern is totally understandable because record-high feeder cattle prices are forcing projected breakeven prices to unheard of price levels. Managing risk after placing calves into a feedlot has become most difficult. The futures market has no carry, meaning deferred contracts are discounted to the front month. The “lack of a hedge” in futures leaves limited choices for managing risk. The LRP program, while fully subsidized by the federal government, can be expensive and inflexible. However, these concerns, while very real, actually have little to do with whether or not the bull market will remain intact.
The forces of supply and demand will determine when the bull market ends. Currently, there is little evidence that any meaningful type of herd expansion has started. Beef cow slaughter has been running consistently below last year, but this appears to be a function of record-high calf prices. My guess is that producers are choosing to get one more calf from that old cow before sending her off to market. Expansions don’t start through low cow slaughter but, rather, through aggressive heifer retention. Producers make the decision to retain heifers for breeding rather than for placement into the feedyard. This is when expansion begins. Of course, in the short term, this also tightens supplies further as placements drop hard when retention occurs. Repeating, there’s no evidence that we’ve entered this phase of the cattle cycle.
There are three main reasons why, despite record-high feeder cattle prices and record-high cash steer prices, expansion of the beef herd has not started. First and most important is widespread drought in the Great Plains. Cows need grass and drought conditions make it difficult if not impossible to maintain an increasing number of cows on a given ranch. Second, the average age of the cow/calf producer in the U.S. is thought to be north of 60 years. Many of these producers have no one interested in taking over the ranch. And third, high interest rates reduce the incentive to expand business, including the beef cow herd.
Finally, there is another serious threat to the supply side of the beef market. This is the spread of the New World screwworm in Mexico. Active screwworm cases continue to edge northward toward Texas. If the screwworm invades Texas this summer, there will not be any expansion of beef cows in Texas, and there’s a strong possibility that large losses of cows could occur. I anticipate that the border will remain closed to feeder cattle shipments coming up from Mexico for the rest of the year.
Measuring beef demand or, more accurately, measuring changes in beef demand is far more difficult than measuring supply. Retail beef prices are record high and they have been record high for over a year. Despite record-high prices, there is no evidence that beef demand has peaked. The function of high prices is to ration tight supplies. As prices continue rising, demand should begin slowing, but currently there is no evidence that beef demand is slowing.
The long-term weather forecaster I use projects that the drought in the Plains will break this summer, perhaps starting in July. If pasture conditions are in excellent shape moving into fall, widespread heifer retention may begin. In addition, the futures market is sending a signal to feedlots to pull cattle ahead. Whereas the record-high price of feeders is sending the opposite signal. To date, record-high replacement costs have encouraged producers to keep cattle on feed longer. As cash steer prices rise to record levels, at some point this may flip producers into pulling cattle ahead. This would drive average weights down and further reduce total production. My outlook is for higher prices.
When this market eventually tops out a massive move lower will occur in the front end. My recommendation for producers is to utilize puts and put spreads to manage risk while leaving the upside to prices open. There is simply no telling how high prices will move before this historic bull market is finished.
*Dennis Smith publishes his evening livestock wire daily. For a free 30-day trial send an email to: [email protected].