The beef industry reached a milestone in 2013 as record prices were posted across the supply chain. So, as we look ahead into 2014, is the adage, “there’s no looking back” appropriate? Certainly, prices across the industry have increased significantly from their 2008-2012 averages, and I believe there is plenty of room for firm price increases during 2014. But, at the same time, I don’t think it is time to throw caution to the wind, particularly with regard to demand.
I think producers will begin building herds during 2014, but the process will be relatively slow even in the face of record calf and feeder cattle prices. Perhaps, if it were not for the severe droughts during 2011 and 2012, we would have seen the end of liquidation already. The implied heifer retention based on changes in the size of the beef cow herd would support this contention. The data suggest that producers actively increased heifer retention during 2009. During 2011, 71 percent of the Jan. 1 replacement heifer inventory calved and entered the herd. Those were heifers retained as replacements in 2009 that were bred in 2010, and this heifer replacement rate is the largest percentage since 1993. However, at the same time, drought-forced cow herd reduction or liquidation pushed beef cow slaughter to the highest level since 1986, and the size of the beef herd did not increase. Consequently, the cattle inventory likely fell another 1 million head during 2013 and will be down 1 percent from a year earlier on Jan. 1, 2014.
As the cattle inventory continues to fall, the available supply of fed cattle has been declining since 2010 with nearly a 3 percent drop during 2013, followed by a 5 percent expected decline during 2014. Furthermore, cow slaughter will be down 7 percent from a year earlier during 2014, bringing total cattle slaughter down 6 percent for all of 2014. It is important to note that in contrast to the cattle inventory falling to a 60-year low, beef production during 2013 will be three times that of 60 years ago. The reasons for this difference include only 2 percent of our total slaughter today is calves compared to 50 percent 60 years ago, and 90 percent of our steer and heifer slaughter are fed cattle. But, at the same time, carcass weights in the last 20 years have increased significantly and it’s not all due to Zilmax. Cattle fed Zilmax were substantially heavier anyway, and the carcass yield of those cattle has been increasing. This production efficiency is important, not only to next year’s outlook but also the future of the industry.
How long can it last?
I think there is a great deal of uncertainty right now in the beef industry, for whatever reason or reasons. Good times seem to create a sense of uncertainty — “this can’t last forever.” Corn prices are off nearly 50 percent from a year ago, and there is already much talk of a bubble in land prices. Every positive economic statistic is followed by one that is negative. The Dow Jones industrial average hits a record and then is off for several sessions. While the fundamentals seem fairly sound, I have to wonder if this is the consensus or the contrarian view. So, is it any wonder that there is uncertainty in the cattle industry?
One cause of uncertainty concerns asset values. As prices have moved into record territory, so has capital exposure, which in turn has created greater risk. I wouldn’t argue that the return to cattle production is significantly higher, and after all, higher return — higher risk. There is a lot of difference between a $500 calf out on the range or pasture and a $1,000 calf. That $500-per-head difference can lead to a lot of worry right up to the time he gets on a truck and someone else takes ownership. Any risk aversion at this point is only multiplied if a rancher went through the drought. Going back to my comment about change, I do think cattlemen are much more aware of managing risk and protecting asset values. It doesn’t necessarily take more cows to generate additional revenue. Increased production from today’s cow herd will do just that, i.e., increased calf crop, tighter calving season or more pounds of beef sold per brood cow, just to name a few. Cattlemen market beef, and profitability is about increasing revenue at a faster pace than costs. Increasing the number of brood cows to produce marketable beef may or may not be the best strategy to do that. If the ranch can produce more pounds of beef per brood cow or per acre of forage, then that may be the optimal strategy when all things are considered.
High times in cattle markets
A look back over the last three years is valuable in assessing the outlook for prices into 2014. Across the supply chain, the largest jump in prices was from 2010 to 2011. For the last two years, the annual increase in prices has been substantially less. For example, wholesale beef prices rose 15 percent from 2010 to 2011, 5 percent from 2011 to 2012 and 3 percent from 2012 to 2013. At the same time, Choice steer prices posted a 19 percent increase from 2010 to 2011 and an 8 percent increase from 2011 to 2012, but this year, were up only 2 percent from a year ago. Feeder cattle prices in 2013 were up 1 percent from a year ago, but posted a 22 percent increase during 2011 from a year earlier. To me, this trend strongly suggests that we may have reached the point where pushing prices significantly higher is akin to “pushing a string,” and I do believe this will be the case for wholesale beef prices and Choice steers. I expect about a 3 percent increase in wholesale beef prices during 2014 and a 4 percent year-over-year increase in Choice steer prices. Calf and feeder cattle prices will find further support as supplies continue to tighten and demand remains strong in the face of falling feed costs. Prices for feeder cattle and calves during 2014 are likely to be up 9 percent and 7 percent, respectively, from a year earlier.
During 2014, cow-calf producers will continue to benefit the most as cattle supplies further tighten. Though feed and energy prices have pushed costs of production substantially higher, the profit margin relative to variable costs has increased to levels never before seen for most producers. Feedlots are benefitting from declining feed costs, but they are pouring all of that benefit into feeder cattle bids as capacity and tightening supplies heat up the competition. That situation will not change during 2014. Feeding margins are expected to improve but remain under pressure. Packers, during 2014, are expected to post improved margins compared to 2013, but as with feedlots, they will face the higher cost of cattle as they did during 2013. Just as important, if not more so, are the demographics, the regulations and intergenerational transfer of the land. It’s not a neat, tidy analysis like it once was, or at least I thought so 30 years ago when I started analyzing this industry.
Any conversation about the future of the beef industry definitely leads to one sure conclusion: Things have definitely changed. I’m not sure how profound that statement is, but change does create opportunity. But that doesn’t mean that I won’t continue to be wary of following the adage, “there is no looking back,” as I assess the outlook for the future.