Outlook, inventory and COOL

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In a webinar Tuesday, sponsored in part by Drovers/CattleNework, Kansas State University economist Glynn Tonsor, PhD, offered analysis of several issues affecting beef cattle economics.

Tonsor began with some of the underlying trends affecting the beef-cattle outlook for 2012 and beyond. With U.S. beef herds at their lowest levels since 1954, calf crops generally declining since the mid 1970s and feeder cattle outside of feedlots as of January 1 at historically low levels, supplies clearly will remain short.

Federally inspected cattle slaughter in the U.S. posted a 5.2 percent year-to-year decline in 2011 and likely will decline another 3.8 percent during 2012. Based on those reductions, the Livestock Marketing Information Center projects fed-cattle prices to average from $123 to $127 per hundredweight for 2012 and $129 to $133 during 2013. Calf prices, according to LMIC, will range from $156 to $164 per hundredweight for 2012 and $158 to $168 during 2013. Tonsor notes that these projected prices are annual averages and probably are fairly conservative – actual prices at times could climb considerably higher.

So will these signals provide enough incentive for cow-calf producers to begin expanding their herds? The January 1 Cattle Inventory report from USDA showed some sign expansion has begun, with beef replacement heifers up 1 percent nationally from a year ago. Regional differences were large, however, reflecting the role of moisture and forage supplies in expansion decisions. The states with the largest increases – Nebraska, South Dakota, Colorado, Wyoming and Iowa – experienced favorable weather conditions in 2011. In the states with the largest declines in heifer retention – Texas, Oklahoma, Missouri, Arkansas and New Mexico – drought has stifled any thoughts of expansion.

But overall, Tonsor says, the cow-calf sector is poised for several years of excellent returns as heifer retention will drain from already tight calf and feeder-cattle supplies. On average, cow-calf producers generated profits of about $80 per head in 2011, and those profits are likely to exceed $150 per head over the next few years. And again Tonsor stresses these are averages – producers with low production costs and high-value calves could see considerably higher profits. “Returns over cash costs may set records in 2013 and 2014.” he says.

Tonsor also notes that K-State economists have developed a spreadsheet decision tool to help producers evaluate the economic opportunities in adding replacement heifers. A link to the spreadsheet is available in the resources section of our MoreCowsNow website.

The stocker segment will see margins squeezed this year due to the run on calf prices. Profits generally will be lower for stocker operators, with individual margins varying depending on cost of gain. The BeefBasis website includes buy-sell spreadsheet tools to help stocker and backgrounding operators project margins on cattle.

Feedyards will have a hard time finding profits this year as breakevens continue to climb faster than fed-steer prices, Tonsor says. Among other impacts, the decline in calf and feeder-cattle numbers has created significant over-capacity in feedyard pen space, which tends to benefit calf and feeder prices as feedyards compete for the shrinking inventory. Since 2007, the number of U.S. feedlots with capacity for 1,000 head or more has dropped from 2,160 to 2,140 – a relatively small change. The number of feedlots with less than 1,000-head capacity has dropped a bit more, from 85,000 to 75,000 over the same period, but Tonsor points out that these operations, often “farmer feeders,” are more likely to move in and out of cattle feeding depending on market trends. Overall, the reduction in feeding capacity has not kept up with the reduction in the U.S. cow herd, which has declined almost 10 percent since 2002.

Tonsor says a budget based on placing a 750-pound steer on feed on February 6, with a projected finishing weight of 1,244 pounds on July 6, projects a loss of $94. He adds, however, that these budgets do not account for the growing importance of premiums for cattle meeting specifications for export or branded-beef programs. Feeding margins in some cases could be more favorable than typically reported.

Tonsor also updated webinar participants on the status of our mandatory country of origin labeling law. The rule has been controversial since its inception, with proponents believing it would increase U.S. demand for domestic meats and opponents believing it would just add costs through the production and marketing chain. He estimates the labeling would need to create at least a 2 to 4 percent increase in demand to justify the costs.

In December, 2008, Canada initiated a complaint with the World Trade Organization (WTO) over the rule, which Mexico joined, and in November, 2011, the WTO ruled in favor of the complaint. Currently, the United States has until March 23 to respond, at which time it could appeal the ruling, accept the ruling and back off on COOL, or do nothing, and accept likely trade sanctions from Canada and Mexico.  Those sanctions could take the form of higher tariffs on meat, which could significantly affect our markets as Canada and Mexico are among our top four meat-export customers.

Consumer awareness of COOL appears to be rather low. Tonsor is involved in USDA studies on the topic, and says a 2011 consumer survey asked whether people believed retailers were required to list the country of origin on meat labels. In this survey, 30 percent responded “yes,” 11 percent responded “no” and 59 percent did not know. Asked whether they pay attention to country of origin on meat labels, 60 percent responded that they never look at them, while 11 percent indicated they often look at them and 29 percent sometimes notice them.

When asked about the WTO dispute, 48 percent of consumers believed the United States should bring its labeling law into compliance with WTO, 37 percent indicated we should keep COOL and pay resulting sanctions while 15 percent replied “other.”

Tonsor personally believes fighting the WTO, and by extension our trading partners in Canada and Mexico, would be unwise. He says the free market can address consumer preferences without laws that endanger trade.

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H. Haby    
Texas  |  February, 08, 2012 at 09:47 AM

Keeping backup for records for Cool needs some verification information adjustments to be functional for all sizes and types of producers, as usual the authors of these rules are detached and distant from the operational realities. Imagine these rules in Brazil or the old west.

February, 08, 2012 at 11:57 AM

the meat buyer for the upscale Shilla Hotel, Yong-ju Lee, stated his confidence in U.S. beef because the cattle are raised on corn, soybeans and grass, and “vitamin-packed” chilled beef is imported to Korea without preservatives. What happened to the adage the buyer is always right?

N. Glennie    
Montana  |  February, 08, 2012 at 07:29 PM

I believe that Dr. Tonsor and most college university economists are brainwashed by the NCBA and the U.S. meat packers. The meat packers would love to import foreign beef and try to mislead Americans into thinking that it is U.S. beef.

Keith Flake    
Snowflake, AZ  |  February, 09, 2012 at 09:16 AM

COOL regulations cost meat packers money and they pass those costs (and more) back to producers in the form of discounts. These discounts are hurting my operation. I feel that a calf I buy from Mexico and sell 12 - 18 months later really is a U. S. product. There are no scientific or cultural reasons to think that it is less healthy or less beneficial to our economy. We sell to Mexico too and want to keep that avenue open.

Keith Flake    
Snowflake, AZ  |  February, 09, 2012 at 09:09 AM

COOL rule must be withdrawn. It's benefits don't outweigh the costs. Packers discount $40 a head for COOL. With COOL we risk a trade war of sanctions by Canada and Mexico. It would be wise to give up COOL.

Charlie Bradbury    
Texas  |  December, 28, 2012 at 10:25 AM

Beware of unintended consequences. COOL has restricted the available supply of cattle for packers who traditionally source Mexican born but USA raised beef because thier retail customers have opted not to sell beef labeled as Product of USA/Mexico. This has created an opportunity for Mexican packers who are filling the void left by their USA competitors with beef labeled as Product of Mexico and available at much lower prices. A survey of retail stores in Texas and the Southwest would reveal considerably more beef in the case that was born, raised and processed in Mexico than was ever there before COOL. So tell me again how this law has helped producers? The rest of the world considers beef that is raised and processed in one country to be product of that country, what is so different about us?

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