Herd Rebuilding Alternatives

By March 3, 2014 Cattle

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by: Wes Ishmael
From Cattle Today

There was a brief window in the late summer and fall of 2003, after Canada was shut out of world export markets because of BSE and before the U.S. suffered the same fate that winter, when the bounce in fed cattle prices was so lofty that folks figured they should take a picture. The confluence of short supplies meeting robust demand in such a dramatic fashion felt like one-in-a-lifetime.

Although it was net return that spiked through that run, the acceleration of fed cattle prices and wholesale beef values in recent weeks has the same feel.

Buoyed by tightening supplies and firming wholesale prices, fed cattle prices reached record-high levels the week of January 20. Packers bid $147/cwt. for cash fed cattle in the Southern Plains that week. They bid $150 up North on a live basis and $240 in the beef. Just a month earlier, live prices were around $130-$131 and dressed prices were mostly $208.

Choice wholesale values, which typically languish for a spell when the year changes, shot up $43.26/cwt. in the same month’s span. Select had increased $49.01/cwt.

Disruptions in the beef marketing chain due to severe winter weather contributed to stouter wholesale beef values, as did the way USDA calculates cutout values. But, the price surge was still amazing considering how difficult even $200/cwt. was to achieve for Choice cutout last year, let alone on a sustained basis.

If and When to Expand

Combine the heady price run with more moisture and forage than many producers have had in years, and plenty are more earnestly considering the uneasy question of whether to build back, when and by how much.

Even before the January rally in fed cattle and wholesale beef prices, the economic incentive certainly appeared to be there for those who can pencil a way to keep back more heifers or buy replacements.

“Cattle prices were record-high in 2013 with tight supplies finally becoming the dominant market force instead of drought and surging feedstuff costs taking center stage,” said analysts with the Livestock Marketing Information Center (LMIC) at the end of December. “Calendar year 2014 is forecasted to bring more record highs. But the lesson of the last two years is that high prices don’t always mean profits. Feedlot closeouts gushed red ink until the last few months of 2013. Many cow-calf operations recorded their highest costs ever due to huge winter feeding bills.”

If domestic and international beef demand is stable in 2014, considering the higher prices associated with the expected six percent to seven percent decline in annual beef production, then LMIC analysts say cattle prices can advance.

“Current forecasts put 5-market average slaughter steer prices for 2014 five percent to seven percent above 2013’s and should average over $130.00/cwt. for the first time,” LMIC analysts say. “After the price run-up in late 2013, resistance to further calf and yearling price increases will come from returns for those feeding cattle. At least into early 2014, all the profit potential of feeding cattle has been bid into feeder animal prices. Further strength in the fed cattle market and lower feedstuff costs will be required to significantly bid-up feeder cattle prices. Year-on-year gains in calf and yearling prices will likely be the smallest in late 2014. In next year’s fourth quarter, another good crop growing year in the Midwest could put calf and yearling prices one percent to five percent above 2013’s.”

Cattle markets are stronger around the world, too.

“The Rabobank Global Cattle Price Index improved further in the second half of 2013, supported by both continuing strong Chinese import growth and lower-than-expected supply in the main export markets, making cattle prices mainly positive,” explained Rabobank analyst Albert Vernooij in a recent quarterly report from Rabobank.

Between last June and December, the Rabobank Global Cattle Price Index increased six percent.

LMIC analysts explained, “In the fourth quarter (2013), yearling and calf prices were higher than any time in history. Instead of the normal softening of calf prices during the fourth quarter, prices took off. In the Southern Plains, 500-700 lbs. steer calves averaged over $187/cwt. in the fourth quarter, 16 percent above 2013’s. Yearling steers (700-800 lbs.) averaged over $167/cwt. in the final three months of 2013, 14 percent above a year earlier.”

Prices are expected to continue historically high because the nation’s cowherd is historically scant relative to beef demand domestically and internationally.

“Despite the likelihood of almost a three year year-over-year decline in total 2013 commercial cow slaughter, the rate of total cow slaughter (ratio of slaughter to January 1 total cow inventory) appears to have continued throughout 2013, matching the high rates of 2010, 2011 and 2012,” says analysts with USDA’s Economic Research Service in the January Livestock, Poultry and Dairy Outlook. “The high cow slaughter rates led to declines in cow inventories and the expectation of continuing declines in January 1, 2014, cow inventory.” That report was scheduled for release January 31.

In other words, perhaps even more than usual, consumer demand could be a limiting factor to expansion notions.

Already, Rabobank analysts noted in their quarterly report that the market has been unable to reach its full potential due to consumers’ resistance against high prices in the United States and the European Union, still two of the main beef markets. In addition, exchange rate movements have impacted the competitive position of exporters, resulting in Brazilian and Argentine beef becoming increasingly attractive and leading to a surge in exports.

“As per capita beef supplies hit historically low levels in 2014 the make-up of households remaining active beef consumers will change,” says Glynn Tonsor, agricultural economist at Kansas State University in a January issue of In the Cattle Markets. “That is, there will not be a uniform reduction of consumption across all prior purchasers. Understanding this not only in aggregate both domestically and globally, but in less aggregated forms across product types and buyer characteristics will become increasingly important. Fortunately beef demand was rather robust in 2013, in part because of these non-uniform adjustments, and I remain cautiously optimistic that this trend will continue in 2014.”

When It’s Time To Consider Rebuilding

“The usual temptation post-drought is to quickly rebuild by buying bred cows/heifers or pairs to restore full production,” explained Derrell Peel, Oklahoma State University extension livestock marketing specialist in his late-December weekly market comments. “This strategy may not be feasible or advisable for several reasons. First, it may not be consistent with managing forage for recovery and improved productivity. While more forage may be available seasonally, it may not be possible to immediately increase year-round forage demands. Secondly, market prices for females have already shown signs of reaching exceptionally high levels and may be financially infeasible, especially if many producers are simultaneously trying to rebuild. The reality is that there is likely not enough cows and heifers available across the country to support massive rebuilding in one year. The U.S. beef cowherd has decreased an estimated 1.85 million head since January 2011. Recovery to pre-drought levels will likely take three to four years at least.”

Peel aimed his comments at Oklahoma producers, specifically, but they obviously have national application.

“The fact is that many ranches were overstocked prior to the drought,” Peel explained. “In some cases it was just a matter of too many animals and in other cases it was due to increasing cow size over time. Producers should consider realistically how many and what size cows best fit their production resources and environment. Rebuilding might be a good time to change genetics and moderate cow size. A more conservative stocking approach will enhance the ability to adjust to variable forage conditions with less financial impact. Combined cow-calf and yearling enterprises can provide enhanced production flexibility and income potential for many situations. Producers should be developing plans, not only for 2014, but also thinking strategically for the next several years.”

Moreover, Peel noted, “The feeder cattle price structure (currently) also provides other incentives and possibilities for forage-based cattle production. The combination of higher feeder cattle prices and changes in feedlot incentives translates into market signals for more forage-based weight gain of feeder cattle. Thus, producers operating with a reduced cowherd should evaluate opportunities to retain calves for post-weaning stocker or backgrounding gain or to supplement cow-calf production with additional stockers. This may be the quickest way to increase ranch income and provide flexibility for optimal forage management.”

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