Outlook for 2012:
Brimming with opportunity, but not without risk

by CattleFax

Summary

An aggressive cow slaughter rate, smaller calf crop and higher percentage of heifers in the fed slaughter mix contributed to smaller cattle inventories this past year. Total cattle numbers are expected to be down 1.2 million head (1.3 percent) on Jan. 1, 2012 totaling 91.4 million head. Smaller supplies will likely drive prices higher for all cattle and beef classes with steady to increasing demand. Higher prices should renew expansion interests, and the U.S. cow herd will likely stabilize and expand going into 2013.

Current market fundamentals indicate cow-calf producers’ returns should continue to be strong in the coming year, but continued volatility means that all segments of beef community should be prepared to aggressively manage for profit margins.

Discussion

Beef cow herd liquidation continued in 2011, marking the 13th time inventories were reduced in the last 15 years. Beef cow numbers were reduced by 600,000 head despite record-high calf values – driven by the drought in the South and Southeast. Look for fewer heifers to be placed on feed, and cow slaughter is expected to decline 9 percent. The primary limiting factor for expansion is weather. More favorable growing conditions in the South and Southeast will lead the U.S. beef cow herd to expand.

Larger feedyard inventories and a smaller 2011 calf crop will lead to tighter feeder cattle and calf supplies in 2012. CattleFax forecasts this supply to be down nearly 4 percent on Jan. 1, 2012 (1.1 million head). Commercial fed steer and heifer slaughter was down 1 percent in 2011 (300,000 head), and with a tighter supply of available placements, expect fed cattle slaughter to be 450,000 head smaller in 2012.

Despite mostly steady beef production, record large beef exports and smaller beef imports pushed net beef supplies 3 percent lower in 2011, while per capita supplies totaled 57.4 pounds. Beef production is forecast to be down 1.8 percent in 2012 (500 million pounds). Demand for U.S. beef exports is forecast to outpace imports next year as well. The positive trade balance – exporting more beef than importing – is expected to widen, and 2012 per capita supplies are expected to total 55.6 pounds.

Wholesale beef demand improved 7 percentage points in 2011 as boxed beef prices increased $20 per hundredweight (cwt.). Stronger exports were the main source for demand growth. Export sales offered considerable price support to lower valued cuts from the chuck and round and also improved packer margins through a $2.50 per cwt. improvement in hide and offal values. Exports are expected to grow again in 2012, forecast to be up 10 percent and adding an additional $26 per head or more to the value of fed cattle.

Demand for a shrinking supply of Choice product will be strong if Wal-Mart continues offering Choice beef and higher end food service business continues to rebound. As a result the Choice-Select spread is expected to remain wide and average on top of $10 per cwt. in 2012.
Fed cattle prices for 2011 are on pace to average near $115 per cwt. and are forecast to average higher again in 2012, in the low $120s, with a range during the year of $108 to the low $130s. Calf prices (550-pound steer) are expected to average near $175 per cwt. and feeder cattle prices (750-pound steer) near $150 per cwt. in 2012.

The range around these annual average prices is expected to be wide in 2012 which is a reflection of the increased volatility the market experienced in 2011. On a dollar per head basis, it should not be a surprise to see a $300 per head swing from high to low during 2012. Volatility from week to week has also increased. In 2011, 40 percent of the time, prices moved at least $30 per head from one week to the next and 27 percent of the time prices moved by $40 per head or more. This is also expected to continue in 2012.

Conclusions

With the higher volatility and higher prices, credit needs are on the rise. Assuming it takes at least 20 percent equity to own and feed cattle, the credit requirement has increased from $170 per head in 2000 to more than $300 per head today. Access to sufficient lines of credit to own cattle, buy feed and manage risk is critical today and will only increase in importance in 2012.

While higher prices and growing global beef demand will provide opportunities for cow-calf producers to expand their herds and upgrade genetics, the increased capital needs and record volatility will continue to force cattlemen in all segments of the beef community to adapt quickly and manage more aggressively for a margin.