Lee Schulz, Extension livestock economist at Iowa State University, offered Agri News his thoughts on the market outlook, beef demand and risk management strategies for the year ahead.
Q: Where are we at now with prices for cow/calf and for feedlot operations? What do things look like for the next 12 months?
A:Projected cow-calf returns for 2016 average $133 per cow and for 2017 average $123. These 2016 and 2017 projections are lower than the historically profitable years of 2014 and 2015 ($530 per cow in 2014 and $303 per cow in 2015), but they are still on par with returns in previously viewed "good years" of 2004, 2005 and 2013. Rising feeder cattle supplies will ease placement costs for feedlots, but will trim cow-calf earnings to more typical levels. Estimated annual average cow-calf costs (total cash cost plus pasture rent) are projected $851 per cow in 2016 a $25 decline from 2015 and a $32 decline from the record high in 2014.
First quarter 2016 Iowa fed cattle prices averaged $132.61 per hundredweight. The April 2016 Iowa fed cattle price was $132.31. Based on live cattle futures prices (adjusted by a historical Iowa-Southern Minnesota basis), forecasts of May-June 2016 fed cattle prices vary from a low of $122 to a high of $125 (average $124), $115 to $118 for the third quarter (average $117 per hundredweight), and $115 per hundredweight for the fourth quarter.
According to the ISU Estimated Livestock Returns, returns for steers sold in March were -$97.52 per head reflecting a fed cattle price of $136.86 per hundredweight, feeder cattle price of $195.03 per hundredweight, and a feed cost of gain of $75.02 per hundredweight. Projected feedlot returns for 2016 average -$95.25 per head. Projected returns for January-August 2017 average -$37.32/head.
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Q: How is beef demand looking?
A:For March, average retail beef prices were down year-over-year. Beef showed increased prices from February to March, however, this is seasonally normal. March average All Fresh Beef prices were $5.86 per pound, 3.3 percent below 2015's and 1.2 percent above February 2016. Average Choice beef prices were 1.4 percent lower in March year-to-year but, compared to February, Choice beef price increased 4 percent month-over-month to $6.22 per pound.
Generally, beef is overall more affordable to consumers compared to a year ago, but seasonality is still present at the retail level. Production increases are expected for pork, poultry and beef. Competition at the meat case for the consumers' dollars will continue to be aggressive.
Q: Feed costs are down, will that fill some of the gap?
A: Lower feed and feeder cattle placements costs in 2016 will alleviate some of the drop in fed cattle prices. In 2016, fed cattle prices are projected to decrease 17 percent year-over-year, feeder cattle prices are projected to decrease 17 percent, and feed costs are projected to decrease 3 percent. Feedlot feed cost of gain was $112.76 per hundredweight in 2013, $85.05 in 2014, $79.08 in 2015, and projected at $76.50 hundredweight in 2016. The projected feedlot feed cost of gain is the lowest annual feed cost of gain since 2010.
Q: What risk management strategies would you recommend?
A:Cattle producers face a great deal of risk, not only in production but also in pricing. The last several months are a reminder of the need for price risk management in a cattle marketing plan. Price risk management, although related to marketing, has a different goal. Managing price risk isn't the same as getting the highest market price.
Producers have many factors to consider in attempting to reduce price risk and uncertainty. A short list includes: enterprise combination, cash flow needs, and financial situation, as well as their personality and attitude toward risk.
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One key goal is to reduce the variability of income over time or at least guarantee a minimum level of cash flow. This allows more accurate planning for items such as debt payment, replacing capital assets and operation growth.
A second goal is to ensure some minimum income level to meet family living expenses and other fixed expenses.
A third reason for minimizing price risk is to enhance survival. Making a judgement on how much loss a business can withstand is a key to a price risk management plan.
One way to establish price risk management objectives is to start with the cost of production and the amount of risk the operation can withstand. With this knowledge, producers can use the futures markets more effectively by finding hedging strategies to lock in a price above or close to the cost of production.
The options markets or Livestock Risk Protection or Livestock Gross Margin allow producers to benefit from rising prices because prices aren't locked in if the market trends favorably. When comparing price risk management alternatives, producers need to consider all costs involved with each and what the most optimistic and pessimistic prices may be.
A good place to learn more about price risk management is Iowa State University's Ag Decision Maker website (Livestock – Markets – https://www.extension.iastate.edu/agdm/ldmarkets.html).
