Cow-calf producers should continue to prosper for at least the next few years, as beef exports boom and national herd numbers remain low.
That was the message from analysts at the National Cattlemen’s Beef Association recent annual meeting in Nashville, Tenn. Southerners, who produce many of the nation’s calves, had plenty to celebrate in Music City USA. They learned current good prices for their cattle should remain in that lofty range for two years or even longer.
“The cow-calf man is in the driver’s seat on this thing. The industry needs calves and that’s what we do,” says Dick Daugherty, Alcoa, Tenn., former Tennessee Cattlemen’s Association president.
Much talk in Nashville focused on rebuilding cattle numbers, which would take some pressure off cattle feeders. That will be difficult to accomplish quickly. Brisk demand supports continued good beef prices. That, plus drought conditions in crucial regions, encourages sending heifers to feedlots rather than retaining them for the cow herd. In order to keep feedyards full, cattle feeders will have to compete for calves.
Whether cow-calf producers elect to take profits now or build for the future, prices should remain profitable for quite some time.
USDA’s cattle inventory report issued just before the NCBA meeting began shows 90.8 million head on hand. That is 2 percent below Jan. 1, 2011 numbers, and the lowest national inventory since 1952.
The report estimates the 2011 calf crop at 35.3 million, down 1 percent from 2010, and the smallest since 1950. Plus, during 2011, U.S. beef cow numbers declined 3.1 percent to 29.9 million, much more than the industry expected, and the biggest drop since 1986.
It is the sixth consecutive year, and 12th year in the past 14, of decline for the U.S. beef cow herd. Since 1996, U.S. beef cow numbers have dropped 15.4 percent. USDA economists note, however, that during those 14 years when slaughter fell just 6.8 percent, national commercial beef production actually increased 3.1 percent, due, most likely, to greater efficiency on farms and ranches.
Many beef industry analysts still hope for a cow herd turnaround, and soon.
“The economic signals are in place for restocking to begin this year. All we need now is a little encouragement from Mother Nature,” says Randy Blach, CattleFax chief executive officer, who spoke in an Opryland Hotel ballroom filled with producers.
Even if Southwest drought conditions improve, though, Blach says he expects national cattle numbers to decline through 2013 before beginning an upward reversal in 2014. That means still higher cattle prices through 2012 and, quite likely, beyond.
Record prices do not necessarily equate to record profits, however. USDA Economic Research Service numbers show that total expenses for U.S. agriculture topped $300 billion for the first time in 2011, up 11.4 percent in just one year. Paying more for feed, fuel and other inputs keeps beef producers’ upbeat attitude from turning euphoric.
“It’s still somewhat difficult to make a profit. We have record prices but we have record expenses, too. On the feeder side, they have high cattle prices and high input prices, and they’re still working on margins. So, that’s a legitimate concern,” says Jim Bostic, West Virginia Cattlemen’s Association executive secretary.
Sizable corn crop
To moderate feed input costs, the U.S. must produce a sizable corn crop this year, and that could be problematic, says Mike Murphy, CattleFax manager of risk management. Some weather analysts project a cool, wet spring in much of the Midwest, which would disrupt normal planting, much like last year.
Murphy expects corn growers to plant a 94-million-acre crop this year, up from just under 92 million acres in 2011. Everything hinges on weather conditions, however.
“If it’s a cold, wet spring, we could see a shift back to soybeans. But the equipment we have now lets farmers get the crop in the ground fast, so there may not be that much shift. The key thing is how Mother Nature treats us. There’s going to be plenty of anxiety in getting the crop in the ground and in how it progresses through the summer. There is going to be a challenge in front of us,” Murphy says.
“We have a historically small corn stocks-to-use level. If we get 94 million acres planted, the stocks-to-use ratio could rise to the 8-percent-to -11-percent range from the current 5-1/2 percent-to-7 percent. But it could take time to build stocks back up.”
Corn exports could increase a bit over the next two years, Murphy says. He points out that, due to production problems and domestic demand, the U.S. exported 44 percent of its corn in 2011 compared to 56 percent over the previous five years. Ukraine and Argentina filled that export gap, he says.
“Even corn is becoming more and more of a global market. That’s not going to change anytime soon,” Murphy says. He expects to see more wheat fed as protein in cattle rations due to the price of corn, which would help to stabilize feed supplies.
Like grain, beef also benefits from a favorable export outlook, continuing the 2011 trend when beef exports increased 22 percent.
“2011 has been phenomenal for beef exports,” says Brett Stewart, CattleFax global analyst. “Exports added $261 per head to the value of every fed steer and heifer. That’s a fantastic success story for our industry and shows how competitive we are in the global marketplace.”
Erin Borror, U.S. Meat Export Federation economist, puts the added value per head at $204, still significant by any measure, and says beef exports totaled $5.35 billion last year. Big beef customers included South Korea, Egypt, United Arab Emirates, Russia, Peru and Chile, in addition to more traditional buyers like Canada, Mexico, Taiwan and Japan.
“The low exchange rate for the dollar kept us competitive in these markets, and the tight global beef supply was a factor, as well,” Borror says
Japan is expected to allow beef from 30 months old cattle into the country rather than limit it to 20 months due to BSE concerns. If that happens, U.S. beef exports should take another jump.
“We don’t have a timeline for that but the good news is, the process is underway,” Borror says.
“Their interest is not necessarily to help our beef industry but to change to help their own domestic industry. They’re looking to go to more the international level. Thirty months is the limitation in a lot of markets. Thirty months doesn’t create the paperwork challenge that 20 months does. Thirty months pretty much makes every animal coming out of a feedlot eligible to go to Japan,” Borror says.
Borror expects China to officially open the door to U.S. beef at some point but has no idea when that will occur. Since China has no cow-calf industry and little domestic experience with beef, she thinks the Asian nation’s food service industry will initially be the big customer.
“In China, we’ll be building beef from virtually nothing. What they’ve consumed is mainly pork. It’s a very exciting situation for us. We look at China as a blank sheet once we get access. The prospects are very exciting. We’re going to have to work on it. They don’t have a cow-calf industry and it’s going to be a stretch when, if ever, they develop one. Right now they have large almost U.S.-style packers but they can’t provide cattle to them,” Borror says.
That prospect intrigues many U.S. beef producers. “If we could just feed every one of the Chinese people one-fourth pound of beef, how much beef would that move? I don’t know exactly but it would be a lot,” says Dick Daugherty, the cow-calf producer from Alcoa, Tenn.
Additional Asian markets could put even more muscle behind U.S. beef exports.
“If we ever get Japan and China really on line, it will be astronomical. We’ll see prices increase even more than now just because of the supply and demand factor,” says Chuck Canter, loan officer with the Central Kentucky Agricultural Credit Association in Lexington.
Canter says lenders in his area consider beef industry loans to be good business these days. “We think these good times are going to continue for at least the next 3-to-5 years. It’s a supply and demand thing. The cow numbers are low. That means the price is high. The dollar is weak, so we’re going to see a lot of beef exports.”
The decline in the tobacco industry fuels much of Kentucky’s renewed interest in beef. “That’s why we want to get into livestock loans more and more. When I say livestock, I’m talking about beef, not hogs or horses or even chickens, and certainly not dairy. It’s beef cattle. Our ground in Kentucky is more suitable for cattle than for row crops,” Canter says.
An almost identical situation exists in Tennessee.
‘We’re certainly not afraid of cattle financing. We are geared toward the individual borrower. It’s all about the person with us. If the farmer is a good risk and wants a loan for cattle, that’s what we’re looking for. We have a lot of cattle customers, part-timers, mostly. We’re not making loans based on expectations in the marketplace. We’re making the loans on an individual customer basis,” says Johnny Sinclair, Farm Credit Service loan officer in Lawrenceburg, Tenn.
Economics of beef
Still, Sinclair likes the economics of the beef business these days.
“It’s been amazing beef prices have held at these levels considering what grain and fuel prices have done. I think the Texas drought had a lot to do with it. My personal opinion, for what it’s worth, is that the beef industry is at a new level. These prices may not go back to the levels they’ve been at. World demand seems to be increasing,” Sinclair says.
In fact, global beef prices have increased 21 percent over the past two years, says Stewart, the CattleFax analyst. With increasing world population, that likely won’t stop, even if the price increase moderates somewhat, he says.
“Beef production declined over the past 3 years while the world added 300 million more people. Food prices are going to remain high and volatile. The tide is lifting. I see no reason for the dynamics to go the other way. I expect higher beef prices,” Stewart says.
The U.S. stands to benefit more than other beef-producing nations, and already has. In 2011, U.S. beef owned 33 percent of the market in the eight largest international beef buying countries, Stewart says. Compare that to five years earlier, when the U.S. claimed only 16 percent of those markets.
“That’s a very strong indicator of how competitive we are and what the future holds for us,” Stewart says.
The immediate outlook is about as good as it could possibly be for cow-calf producers, says Kevin Good, CattleFax senior market analyst. “I’m expecting positive margins and record high calf prices. We’re going to have a lot of 5-weight calves sell for $2 per pound this year,” he says.
Stocker/backgrounders should also profit in 2012, though their margins will be narrower than cow-calf producers’. The troubling side of the industry comes in the nation’s feedlot sector.
“Feedlots are going to be negative for the year. For them, risk management is the important thing,” Good says.
Feedlot managers will have to figure expenses carefully and buy cattle wisely.
“I expect a $300 per head range in highs and lows in 2012,” says Blach, the Cattlefax CEO. “The feeding industry has seen a 60 percent increase in credit needs since 2009. Fed cattle breakevens will be in the mid $130’s by summer.”
Blach cautions everyone in the beef business to keep a cool head.
Cautions and warnings
“Don’t get caught up in the euphoria. These are dangerous times when we get all the people running in the same direction. Markets make corrections. Markets work, and they will continue to work. We will grow the cow herd over the next several years,” he says.
While it is entirely possible that cow numbers will indeed increase, it will not happen quickly or easily. For one thing, there must be enough quality bulls to produce those extra first-rate calves the export markets demand.
“The reality is that we need to find 3 million head over the next 5 years, and we’re still killing off cows. In order to expand, we have to have more replacement heifers and bulls to breed them. If you figure 20 to 30 cows per bull divided by a million, that tells you there’s going to be a great deal of demand in the registered cattle business,” says Joe Massey, International Brangus Breeders Association executive vice-president.
Keeping beef quality high during expansion has to be the primary consideration, says Ryan Peterson, herdsman for Leachman Cattle, Wellington, Colo., which produces Angus, Red Angus, Charolais and composite breeding stock.
“If conditions favor expansion, your genetic selection decision becomes paramount when you’re trying to decide if you’re going to progress from within the herd or bring outside genetics in,” Peterson says.
“People who have progressively moved the genetic base forward in the cow herd are going to see dividends. Those who don’t make genetic improvements in the cow herd are going to fall behind. There are lots of things to consider: breed, type, pedigrees, birth weight, feed efficiency, rate of gain, plus cow size. How big is too big? Is a 1,600-pound cow optimal? How about 1,200 pounds? The genetics the producer selects to expand with have a big impact.”
Even with good beef prices, cattle producers still face a lot of risk.
“You’ve got to be aware of the risk management required to be profitable because of the volatility of this industry,” says Matt McKamey, Rabo AgriFinance relationship manager, Great Falls, Mont.
“Your risk exposure can really make it difficult to be profitable. The margin hasn’t changed tremendously but it takes a lot more capital to get there. You have to manage risk responsibly.”
It’s still an industry requiring tough decision-making. That is unlikely to change, no matter what the price per pound may be.
“The big deliberation is, are you going to sell that 700-pound heifer for $1,000 or keep her and get a calf out of her? We’re getting a good payday for calves but we know we need to expand. You could say we’re catching up for all those off-years when the market wasn’t good,” says Butch Foster, Virginia Cattlemen’s Association fieldman.
More than 8,200 people attended the NCBA meeting in Nashville. J.D. Alexander, a third-generation rancher and cattle feeder from Pilger, Neb., is the new NCBA president.