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Amid the carnage wrought by the LFTB situation over the past few weeks, we think some basic fundamentals of the current beef situation are getting overlooked. While this is a demand hit that no one saw coming, there are still some factors — especially on the supply side — that are going to cause some major changes in the beef situation. The short-term impact of 50% CL trim prices plummeting are negative for sure but let’s remember some basic facts of the current situation.
• Cutout values are still high by historical standards. Yes, it now appears that the magic $200 level may not materialize this year when just a few weeks ago it appeared to be a lock. But the Choice cutout still averaged over $180 last week. Monday’s $1 gain has been erased by two more down days but the value was still $177.09 yesterday. That is still higher than any cutout value prior to 2011 except for those two weeks back in 2003. Yes, we know costs are different and we agree that this situation is unfair but the cutout value is still nearly $180!
• The number of feeder cattle available in the country is still VERY LOW relative to history. The Livestock Marketing Information Center (LMIC) in Denver estimates, based on USDA’s January 1 cattle inventory data, that there were 25.8 million head of feeder cattle outside of feedlots on January 1 this year. That is 4% fewer than one year ago and nearly 7% fewer than on January 1, 2010. This year marks the first time EVER that beginning-year feeder cattle numbers have been below 26 million head. And the trend will almost certainly continue this year. The last time that a U.S. calf crop was larger than the preceding year was in 1995.
• There is no big move toward expansion at present. Heifers being held for beef cow replacement numbered 5.212 million on January 1 — 1.4% higher than one year earlier. Moreover, this year marks the first year since 2006 that the year-onyear change has been positive. A big reason for this positive but small number is, of course, the fallout of last year’s drought in the southwestern states that hold so many beef cow. Heifer numbers in Texas, Oklahoma and Missouri — the top three cow-calf states — were down 60, 55 and 30 thousand head, respectively, from one year earlier. The percentage declines are 9.8, 15.5 and 10 for those three states. Heifer numbers in New Mexico were down 20,000 or 21%. Numbers are growing in states that have grass —Nebraska, South Dakota, Colorado, Wyoming—but until the big cow-calf states know they have enough forage, cow numbers will not increase much.
• The stage is set for expansion. The factors cited above point to exceptional returns for cow-calf operations in 2012 and 2013 provided the U.S. corn crop is not a complete failure. The chart at right shows LMIC’s estimates of cow-calf returns over cash costs (including pasture rent) since 1984. The next two years should shatter previous record highs based on current expectations for calf prices. The cattle business differs from other livestock/meat businesses, though, in that what people WANT to do and what Mother Nature ALLOWS them to do are sometimes very different things. Pasture conditions are improving in those big cow-calf states but it is only spring. The moisture situation, including pond/stock tank levels, is still far from good in many areas and it is only April. The summer months will be the test of whether the drought is over. The beef cow herd usually lags profits by two years. The 2012 herd is a function of losses in 2008 and 2009 plus the drought. Profits in 2010-11 and improving grass conditions should spur heifer retention and cow herd growth. More heifer retention will tighten feeder cattle supplies even further over the next two years — a major reason for those $200-plus per cow forecasts.
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