As in all of animal agriculture, production costs have risen sharply in the cattle sector, primarily as a result of rising feed costs. For example, in the cattle finishing sector a monthly survey of commercial cattle feedlots by Kansas State University indicates that the cost of gain increased from an average of about $0.54 per pound in 2006 to $0.74 in 2007 and preliminary estimates indicate feedlot costs of gain will average well over $0.80 per pound during 2008, an increase of 54% in just two years. Cattle feeding returns estimated by Iowa State University indicate cattle feeders experienced the largest loss on record ($167 per head) during April since the series began in the 1960s.
Production costs in the cow–calf sector have also skyrocketed over the last two years. Again, most notable has been the rise in feed costs. Kansas Farm Management Association (KFMA) data documents the shifting cost structure as feed costs per cow increased from $287 in 2006 to $346 in 2007, an increase of 21%. Recent feed grain and protein supplement prices, along with a sharp increase in forage production costs, indicate that total feed costs will rise again during 2008, possibly approaching $450 per cow, an increase of more than 50% in just two years. The same KFMA data indicate that returns in the Kansas beef cow–calf sector still exceeded variable production costs in 2007 by about $50 per cow, but the projected rise in feed costs during 2008 will almost certainly push returns below variable production costs, encouraging some producers to either reduce their herd’s size or to exit the industry.
It’s important to note that the losses experienced in the cattle sector were not associated with large cattle price declines. In fact, prices for slaughter weight cattle in Kansas were record high in 2007, averaging $93 per cwt., 8% higher than in 2006. Increasing feed costs did push calf prices down 1 to 2% in 2007 compared to a year earlier, but annual average calf prices were still the third highest on record. So the reduced profitability was directly attributable to rising costs, especially feed costs.
Higher beef prices in the next few years from stronger domestic demand seems unlikely as beef demand has weakened moderately since 2004. Consumers’ disposable income is a major determinant of consumer demand for beef and slow, or even negative, growth in the U.S. economy during 2008 and 2009 means there will be little likelihood of an increase in domestic beef demand in the short run.
Export demand for beef is improving and will help support beef and cattle prices. Since plummeting in 2004, following the discovery of BSE in the U.S. herd, beef exports have increased significantly. However, U.S. beef exports in early 2008 were still 36% below the same period in 2003. Based on the trend established early this year, U.S. beef exports in 2008 could total 6 to 7% of beef production (still below the 10% of production exported in 2003), which effectively reduces the supply of beef available in the domestic market and hence supports beef and cattle prices. Although current exchange rates will continue to boost U.S. beef exports and discourage imports, the short–run change in domestic supplies resulting from an improving international trade picture is not expected to be large enough to offset the dramatic increase in production costs.
If beef, especially export, demand does not increase enough to yield beef and cattle prices that are high enough to offset the rise in production costs, how will the industry respond? The short answer is that the industry will shrink in size to the point where fewer pounds of beef are marketed to U.S. and international consumers. This shift in the beef supply curve will yield higher prices throughout the beef sector and, over a period of several years, allow producers to cover average total costs. The magnitude of the supply shift that will be required will depend on whether feed grain prices continue to increase or stabilize at their current level and how rapidly beef exports recover, especially to the Pacific Rim countries. Modest herd liquidation is already underway as the U.S. beef cow herd declined by about 1% during 2007. Slaughter data through May 2008 suggests that the liquidation is still underway and might have accelerated somewhat from the 2007 pace. Looking ahead, the U.S. beef industry could be facing several more years of herd reduction before prices rise sufficiently to offset the new production cost regime.
John D. Lawrence, James Mintert, John D. Anderson and David P. Anderson