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The Good, The Bad, And The Ugly Of 2017 Cattle Prices
DR. ANDREW P. GRIFFITH
KNOXVILLE, TENN.
Many cattle producers are in the process of evaluating the results of the production and marketing plan for 2016 while also making plans for 2017. Plans can be made, management can be performed, and money can be spent, but nothing guarantees cattle prices will be at a profitable level. It is very difficult to know what the future holds, but using the past and evaluating expectations can lead to improved decision making.
The Good: Many producers would disagree that there is anything “good” to say about the outlook for cattle markets in the coming year. However, there appears to be some positive aspects. The first positive aspect is a movement towards more seasonal price patterns than what have been experienced the past several years. Thus, producers will likely benefit from making marketing plans based on seasonal price trends.
A second positive expectation is reduced volatility in the market. The past several years, prices have experienced historically large price swings from week to week (sometimes day to day) and then moved the opposite direction in the following weeks. Sudden and large price swings can greatly impact revenue produced by the cattle operation.
The Bad: The “bad” of the cattle markets in 2017 is lower prices. The record high prices of 2014 and 2015 are a distant memory, and prices during the late summer months and early fall months of 2016 were dismal to say the least. Lower prices are partially due to increased beef production. Through the first 46 weeks of 2016, federally inspected steer and heifer slaughter were up 7.0 and 3.4 percent respectively compared to the same time period in 2015 while 2016 cow slaughter was up 13.1 percent during the same time period. The increased slaughter rates have led to federally inspected beef production increasing 5.7 percent through the first 11 months of 2016 compared to the same months in 2015.
The bad part comes to fruition with the expectation that beef production in 2017 will be 3.5 to 4.5 percent greater than 2016 and even higher production in 2018. The cattle herd has grown quickly the past couple of years and the January 1, 2017 report will once again report growth in the beef cattle herd. Increased female slaughter, cows and heifers, has not reached levels that will result in decreased cattle inventory. It may be 2018 before producers begin reducing the herd size.
The Ugly: The “ugly” part of the business will be the balance sheet. Most producers experienced “economic” profits in 2014 and 2015. This means producers received revenues in excess of variable, fixed, and opportunity costs. Opportunity cost is the value of the next best alternative for the resource. For instance, most producers do not place a cost on owned land, but the land could be rented which would be the opportunity cost. One’s own labor is another cost that is often not on the balance sheet.
Economic profits were strong in 2014 and 2015, but 2016 is another story as accounting profits (total monetary revenue minus total monetary cost) became difficult to recover the second half of the year. The key to continue producing any product in the short term is to cover variable costs. There will be some producers who have a low cost structure which will result in a profitable operation in 2017 while there will be higher cost producers that will likely find it difficult to cover monetary costs. Many producers will be looking at a cash cost ranging between $550 and $750 to carry a cow in 2017.
The Outlook: The previous dialog may seem negative towards being profitable in the cattle business. However, producers can have a profitable year in 2017 if costs are managed closely. Prices in 2017 will likely be 8 to 15 percent lower than the 2016 annual average price, but this leaves room for profits. Producers should be evaluating management practices and marketing alternatives that can add value to cattle as well as considering methods to reduce production costs without negatively impacting production. Plans should be made, management should be performed, money will have to be spent, and prayer is a necessity, not an option. ∆
DR. ANDREW P. GRIFFITH: Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee
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