Cattle producers hit it out of the park in 2017 — but this year is going to be a completely different ball game.
“Last year, we saw some pretty big home runs, and I don’t really anticipate that for this year,” said Brian Perillat, manager and senior analyst at Canfax.
“Small wins might be all you get this year.”
For most sectors of the cattle industry, 2017 was a year that exceeded expectations across the board, said Perillat.
“Prices were better than expected, and pretty much every sector of the beef industry was profitable,” he said.
And while market prices are still above where they were a year ago, cattle producers will need to temper their enthusiasm with realistic expectations as they head into spring.
“I’m not sure we’ll see prices quite as high as last year. But 2016 was pretty disappointing, and we don’t anticipate a repeat of that.”
Right now, the North American cattle industry — particularly in the United States — is in expansion mode after nearly five years of flat numbers in the national herd, and that trend could continue over the next three years. And where the U.S. goes, Canada typically follows, so producers can expect to see more production this year.
“I’m a little cautious as we head further into the year,” said Perillat. “We’re going to have more beef production to deal with, so we’re going to need a strong export and domestic market for 2018 to carry that momentum.”
International demand could keep pace with that increased production as long as trade deals continue to move forward. The Trans-Pacific trade agreement, which is slated to be signed this month, will be critical, as will NAFTA, which is still up in the air.
“We’re highly reliant on trade. We’re really going to need trade and international demand to step up,” said Perillat. “We’re very integrated with the U.S., so any kind of disruption to that would be negative. I don’t think the sky is going to fall. It’s just something we’ve got to be aware of.”
Domestic demand for beef is also on the rise.
Cattle are getting processed in a timely manner, said Perillat, and that helps market prices. Despite rising production, retail prices have remained strong, and with the strong economic outlook for 2018, domestic consumers should continue to purchase beef even with the higher prices. But beef will continue to face competition from pork and poultry, which are also expected to see record-large production numbers. Any price pressure from competing meats could drive down beef prices.
“Beef demand is such a big driver, but it’s really hard to measure and anticipate,” said Perillat.
“But demand has been good so far.”
For the fed cattle and calf markets, basis levels have been “phenomenal,” and if that continues, the feedlot and calf sectors will profit. But that’s getting hard to predict, he cautioned, and if basis levels drop to historical levels, the calf market will suffer. For example, if the basis is $6 more than expected, calf prices jump up almost $15 more per hundredweight — and the inverse is also true.
“For several weeks last year and to start this year, we were at a large premium to the United States, but we’ve seen that realign to where we’re near par right now,” said Perillat.
“Looking forward, that’s going to be a huge factor. I think we should have fairly strong basis levels, but whether or not we can maintain a premium will be the question.”
A weaker Canadian dollar will also support cattle prices, he said. Since 2015, the Canadian dollar has generally been below 80 cents, and that’s helped the cattle industry over the past three years. But the dollar has been stronger than expected over the past six months, and if it rises over 80 cents, cattle prices will take a hit.
“In the cow-calf sector, if you do some projections today, we could be around that $2 calf range, but depending on the dollar and different scenarios, it could be lower than that,” said Perillat.
The weather — particularly droughts in the southern United States, Alberta, and Saskatchewan — also has a role to play. Over the past five years, U.S. herd expansion has been helped by good weather conditions and feed availability. That could change this year.
“If we continue to see drought persist, we could see more cows go to slaughter than anticipated,” said Perillat. “That will weigh on the market — not only by increasing cattle supplies but by increasing feed costs.”
So in order to stay profitable, keep a close eye on your margins, he advised.
“Most of the successful guys pay close attention to the production side to get their cattle to perform and maximize efficiency,” he said.
“It always comes down to some kind of risk management plan.”