America’s cattlemen are facing extraordinary times. Under normal circumstances, the historic decline in feeder cattle supplies would dominate the discussion about industry trends. This year, however, any discussion of a cattle market outlook must begin with the effects of a devastating two-year drought, and its impact going forward.

“If soil moisture improves and pasture conditions begin to recover, beef cow numbers should stabilize next year and begin to increase by mid-2014,” says Doane market analyst Marty Foreman. “The first step is reduced cow slaughter rates along with increased heifer retention. However, this hinges on weather. So far there has been little improvement in drought conditions.”

Cattle markets were held in check all fall by the lack of moisture. USDA Market News reporter Corbitt Wall noted in his commentary last month, “Current stocker and replacement cattle purchases at every level — from a 300-pound calf to an older bred cow — probably have the widest range of expected return than any time in history. Even some moderate measurements of moisture should cause prices to soar past record levels, while continued dry conditions will limit spring grazing prospects and cause further sell-off of breeding stock.”

America’s beef cow herd has declined for six years in a row and 14 of the past 16 years. Lingering drought conditions over the central Plains states mean that trend will continue. Industry analysts expect the Jan. 1, 2013, beef cow herd will be down about 1.5 percent to approximately 29.5 million head. Fewer cows will mean fewer calves and, ultimately, fewer stocker and feeder cattle.

The silver lining in smaller supplies is that feeder cattle prices climbed to new record highs during 2012, and those marks are likely to be eclipsed again in 2013. But while higher prices are good for cow-calf and stocker operators, they mean higher input costs for feedyard operators. Historic feeder cattle prices coupled with higher corn prices will continue to make cattle feeding a risky venture in 2013.

Cow-calf profits
Cow-calf producers are in the driver’s seat for 2013 and well beyond. The beef industry has a desperate need to expand the herd, but Mother Nature must cooperate. Even when the rains come, analysts recognize expansion will take years. Until then, cow-calf producers should enjoy good profits.

Prospects hinge on moistureCattle-Fax market analyst Lance Zimmerman says, on average, cow-calf producers earned $150 to $200 per head on their calves last year, and good profitability will continue through 2013. Prices for all classes of cattle are likely to continue moving higher, but the rate of increase is slowing as the high price of beef begins to affect demand.

In spite of the 2012 drought, which affected at least 50 percent of the U.S. cow herd, cow slaughter dropped off compared to the 2011 rate. Zimmerman says producers in the Midwest have been highly motivated to keep their cows and are using a variety of alternative feeds to carry them through the winter in hopes of better conditions to come. If the drought continues over a wide area in 2013, Zimmerman believes additional herd culling will result. Cattle-Fax says the rate of U.S. cow culling dropped 5 percent last year relative to 2011, and another 11 percent drop is expected during 2013. Heifer slaughter slowed somewhat last year, indicating producers in some areas are beginning to hold more heifers for breeding.

Eventually, as conditions improve, producers will begin rebuilding herds. A question, though, is just how many more cattle we need, as beef production per cow continues to grow. Assuming that domestic per capita beef consumption holds steady at around 57 pounds per year, beef exports expand to 20 percent of production and carcass weights level off, Cattle-Fax believes we will need to add 4 million more cows to U.S. herds over the next decade. If carcass weights continue to increase at the current trend line of about 6 pounds per year, we will need to add just 2 million cows to meet demand by 2022.

Feedyards feel the pinch
Feedlots incurred huge losses feeding cattle through last summer and fall as margins were severely impacted by declining fedcattle prices and sharply higher feed costs. Feeding losses soared to over $200 per head, peaking in August. Over the last several weeks, corn prices have eased and the cattle prices have improved, but losses exceeding $100 per head are projected for the first quarter of 2013.

Prospects hinge on moisture“Losses should ease this year,” Foreman says, “but it may not be until next fall, assuming a normal growing season and lower grain prices, before feeding margins become positive. In addition to high feed costs, feedlots tend to bid up the price of feeder cattle, further limiting profit potential.”

Last year, higher feeder cattle prices were driven by supply numbers that declined by more than 1 million head. For 2013, analysts expect a smaller decline of 200,000 head as cow numbers stabilize at around 29 million head over the next two years.

Still, the feeding industry must cope with overcapacity — a steady number of yards competing for a dwindling supply of feeder cattle and calves. Additionally, retained-ownership customers will become increasingly hard for feedyards to find as selling feeder cattle may just be too profitable.

Declining supplies of cattle will also begin to provide leverage to feedyards in 2013. Packers will fi nd themselves searching for cattle to fill needs, and prices for market-ready cattle will improve. But as higher prices move up the chain, consumers may be reluctant to spend an ever-increasing portion of their food dollars on beef.

Domestic beef demand last year was down somewhat from 2011, largely due to higher prices, and beef demand for 2013 will depend largely on the overall economy. A 1 percent change in real income — up or down — affects beef demand by an equal percentage.