Just before Thanksgiving last fall, USDA Market News reporter Corbitt Wall called the cattle and beef markets “the most impressive” in the industry’s history. Record prices were reached on a regular basis for calves, yearlings, fed cattle, Choice carcass cutout values and 50-percent-lean beef trimmings. It was a memorable season, and, according to those who earn their living watching agriculture markets, the good times are far from over for beef.
“It’s a great time to be in this industry,” Cattle-Fax president Randy Blach told cattlemen at various industry events last fall. “We have more people to feed and a growing global economy. I don’t know of a better industry to be involved with than agriculture because the underlying fundamentals are strong.”
The key to Blach’s and other economists’ optimism are those underlying fundamentals. They’re critical because any cowboy with a little grey in his beard will express caution about current market prices being “nearer the top than the bottom,” meaning prices are more likely to drop than climb.
click image to zoom However, Blach said 2012 and 2013 should provide excellent profit opportunities for ranchers. Declining inventories of stocker and feeder cattle will continue to support prices and keep cow-calf producers in the driver’s seat.
“If you’re in the cow-calf business you’ve got what everybody else wants,” he said. “Prices (for calves) will continue to move higher next year. If you’re in the stocker or feedlot business, you’ll continue to face tight margins, but there will be opportunities.”
Of the several factors supporting cattle prices, a declining inventory is probably the most significant. Economists such as Jim Robb, director of the Livestock Marketing Information Center, and John Nalivka, president of Sterling Marketing, Vale, Ore., expect both the overall cattle inventory and the inventory of beef cows to show a 2 percent decline from 2011 to 2012.
“Another significant year-on-year inventory decline will be reported on Jan. 1. 2012. If recent trends persist, the beef cowherd will decline by a full 2 percent this year,” Robb says.
Nalivka says, “Cattle herd numbers will continue to decline during 2012, pushing the inventory to near 89 million head. The 2011 inventory was the lowest since 1952, and that year will remain the backdrop for the U.S. cattle herd for the next five years.”
In other words, even if ranchers begin expanding their herds this year calf prices and ranch profitability should remain good for the next
two to four years, a fact feedyard operators acknowledge.
Tom Brink with J&F Oklahoma Holdings, Inc., says cow-calf producers will have the leverage in the market over the next few years, especially if they can shift their marketing toward yearlings rather than calves. J&F Oklahoma Holdings is the company that owns most of the cattle fed by Five Rivers Cattle Feeding, which operates 12 feedyards in seven states with a one-time capacity of 960,000 head. Those feedyards, Brink says, purchase an average of 35,000 feeder cattle and 2 million bushels of corn every week.
High cost of gain in the feedyard, which averaged over $100 per hundredweight in Five Rivers yards in 2010, will continue to shift feedyard demand toward yearlings and away from calves, Brink says. This tends to narrow the price spread between calves and yearlings.
“This (2011) is the first year in history the United States has been a net beef exporter,” Blach said. “That’s a huge deal for our markets.”
Cattle-Fax data show beef exports added $50 to the value of a fed steer in 2004, but that had increased to more than $260 per head in 2011, and there’s more opportunity for growth in foreign markets.
“It’s easier to export more product because the dollar is relatively cheap compared to foreign currencies,” Blach said. “Global economies are growing faster than the U.S. economy, and global beef supplies continue to shrink.”
Additionally, while beef supplies shrink, global populations are growing rapidly. Over the next 10 years the global population is expected to increase by 700 million people, and 27 million in the United States alone.
“There are more people to feed and a growing global economy. That’s a great position for you.”
Historically, tight supplies and strong demand meant good times for cattlemen. But the current dynamics of the industry are problematic for some important stakeholders. Specifically, cattle feeders and beef packers have some legitimate concerns about their ability to operate in the near-term.
“We can’t continue to support our industry’s infrastructure with the declining inventory we see today. It’s not a trend we want to continue,” Blach said.
Most analysts believe the industry has excess bunk space, a fact that is going to grow into a significant concern moving forward. Analysts say many smaller operations — mostly in the Corn Belt — have already closed and are marketing their corn as grain rather than through cattle. Many of the cattle that would have been fed in those operations are now showing up in larger feedlots, which has helped stall the looming empty-pen symptom.
Another reason excess bunk space has not been readily apparent is that drought drove a lot of cattle into feedyards early during 2011. But later this year, analysts warn, empty pens will be a tell-tale sign of the shrinking supplies.
Packers have excess capacity problems of their own, and as the tighter supplies work through the system, packers will likely move to reduce their overhead costs — reducing hours or closing plants.
The declining inventory also means packers have increased bids for cattle, and retailers have had to pay more for beef products. Cattle-Fax data shows a 20 percent increase in cattle prices during 2011 but only a 10 percent increase in retail prices.
“Retail margins have been squeezed. Retail prices will have to move higher (to compensate),” Blach said. “We won’t see as many beef features by retailers (in the near future).”
Blach acknowledged the spread between Choice and Select beef has widened in recent months, due in large part to a decision by Walmart to add Choice beef to its meat cases.
“We’ve seen the Choice/Select spread widen to $18 or $19, and it could easily be $10 to $15 over the next 12 to 18 months. You need to consider that and possibly make some adjustments to your production. The spread will trump weight.”
Blach also acknowledged that with higher cattle prices have come higher costs and greater risk. He said cattle producers now need 37 percent more money to operate than they did just two years ago.
“Manage your margins; don’t guess on the market. The markets are going to be volatile. Higher prices don’t necessarily mean higher profits.”