Cattle

Industry drivers 

Strong sales prices

Northwest producers have benefited from favorable sale prices. Bull prices have been incredibly strong in the $6,000-$6,500 median range, more than $1,000 higher than 2022 sales. Bull prices tend to be correlated to calf prices, and some areas of Montana have already seen feeder calf sales as high as $250 per cwt. However, the uncertain spring forage situation and high hay costs may affect the market in the short term. Spring conditions could cause summertime sales prices for bred heifers and cow and calf pairs to increase considerably, specifically if there’s enough forage to feed cattle cost-effectively.

Smaller beef herds support higher beef and cattle prices

After three years of severe drought-driven liquidation, the U.S. beef cow herd has reached the lowest level on record, putting upward pressure on cattle prices. Drought in cattle-producing states, most notably in the Southern Plains, dried up pastures and limited feed supplies. For Northwest cattle producers, higher hay costs reduced profitability and producers liquidated cattle in response. The U.S. beef cow herd fell to 28.9 million cows on Jan. 1, 2023, the smallest herd on record. Every cattle inventory category (cows and heifers that calved, heifers, steers, bulls, calves) saw an annual decline. Montana, Idaho and Oregon beef cattle inventory all declined year over year, with the most significant inventory decrease in Montana, with 50,000 fewer cattle (a 2.3% decline).

Source: USDA NASS.

Fewer cattle on feed, but not yet enough to determine if the industry is rebuilding herds

Fewer cattle on feed support bullish cattle and beef prices. As of March 1, there were 4.5% fewer cattle on feed year over year, and feedlot placements decreased by 7.2% compared to the same period in 2022. Based on a similar cycle in 2014, it could take up to three years for heifer retention and national inventory growth to begin. However, producers retaining more cattle doesn’t necessarily mean the cattle industry is fully starting to rebuild inventories. Further liquidations are possible if pasture conditions worsen due to another year of drought. As of March 21, 2023, 46% of cattle and 38% of alfalfa acres are in drought-affected areas. The most concentrated area of drought is the Southern Plains, which accounts for more than a third of the national cattle herd. If drought conditions lead to further liquidations this year, it will take longer for the national cattle herd to rebuild.

Source: U.S. Drought Monitor.

Cattle exports remain historically high

The USDA expects 2023 export volumes to fall to 3.09 billion lbs., a 13% year-over-year decline. Despite the significant decrease, if realized, 2023 beef exports would be the third largest annual export volume on record (behind 2022 and 2021, respectively). China suspended the import of Brazilian beef on Feb. 22 due to a case of BSE (bovine spongiform encephalopathy, also known as mad cow disease). Brazil supplies China with 41% of its total beef imports and the suspension allows the U.S. to increase its Chinese export share.

Profitability

Higher fed cattle prices and sizeable export volumes will create tailwinds for producers’ profits. A shrinking national herd and sustained demand for cattle have elevated prices. Cow-calf margins are predicted to benefit from higher prices with margins of over $300 per cow, up 80% year over year. Producers that could sustain their herd size throughout the drought will now benefit from higher prices. Those rebuilding their herd will face some headwinds from the high bred cow costs or reduced cash flows (if they retain more of their herd) but should benefit from softening feed costs.

Rising feeder cattle prices and elevated production costs could pose risks to feedlot and packer margins, although analysts expect to see moderate profits. Feedlots have long navigated volatility in the feed grains and feeder cattle markets; however, headwinds from rising interest rates and sticky inflation will threaten profits. Historically, feedlots have operated on low-interest rates. Now, rates are two times higher than in recent history and may increase another 200 to 300 basis points as the Federal Reserve continues to fight inflation.