U.S. cattle markets are showing positive momentum in the first quarter of 2018, following their second-most profitable year on the books. But the year ahead could slow the roll on favorable markets.
Cattle prices for the year to date have been holding at, or above, expected levels, supported by a continuation of solid demand by both domestic and export markets, analysts at Rabobank stated in their most recent beef quarterly report.
The slower-than-expected expansion in the U.S. cattle inventory in 2017 and the heavy front-end load of cattle on feed due to drought creates a tighter than expected supply and brighter outlook for the second half of 2018, they said.
But “while market tone has started the year with solid footing and continuation of profitability in all sectors, there are a number of potential headwinds that could become driving issues as the year unfolds,” the analysts said.
Those headwinds revolve around drought, increased production and trade.
The foremost concern is drought, with 27 states showing some level of drought stress. Those states represent 76 percent of the cow population, Don Close, senior analysts with RaboResearch, told Capital Press on Thursday.
Conditions have improved in many areas in the last couple of weeks. But with that much of the cow population in areas at risk of drought liquidation, it’s really an issue that needs to be monitored, he said.
Cattle on feed numbers are up 8 percent from year-ago levels, with aggressive placements of calves due to lack of winter wheat pasture. That’s not a show-stopper in itself because of the number of light cattle on feed that will be well distributed throughout the year, he said.
“But if we start to build weight, total (beef) production will be a big concern,” he said.
With good availability of feed grains at very attractive prices, it will be critical to avoid excess carcass weights in order to keep total beef production at manageable levels, the analysts said.
The other uncertainty in the market is U.S. trade policy. North American Free Trade Agreement negotiations are progressing slowly, and there is still discussion of reopening the U.S. trade agreement with South Korea.
President Donald Trump’s intention to impose tariffs on steel and aluminum imports adds the concern of counter duties on U.S. agricultural exports, Close said.
In addition, the 11-member version of the Trans-Pacific Partnership was signed this week — without the U.S. While the U.S. continues to deal with tariff issues with Japan, the agreement is expected to bring gains for other beef exports through reduced tariffs into Japan — a key global beef importer, the analysts said.
There continues to be chatter that Trump would be interested in trade talks with those countries, but any trade deal would take a long time to accomplish, Close said.
But U.S. beef exports seem to be holding, and the U.S. is positioned very well as a global supplier of high-value product, he said.
“Without trade conflicts, I think exports will continue to grow,” he said.