Livestock Outlook; Slow Road to Herd Expansion
Agriculture’s golden sector is livestock. Though prices have eased since their summer peak, they are still at high levels. In fact, the price strength surprised many given the level of production. The disconnect between the reduction in red meat production — about 1% — and this summer’s price rally — as much as 40% — attests to how inelastic meat demand has become, said Dhamu Thamodaran, chief commodity hedging officer for Smithfield.
That disconnect promises continued strong prices in 2015. Add projected corn carryout at its highest level since 2004-2005 and the resulting collapse in feed costs, and it’s little wonder producers are enjoying sustained profits. Unlike past cycles, however, expansion isn’t likely to crush margins anytime soon, especially if you’re a beef producer.
“Obviously, prices have reached levels that caught many by surprise,” said Mike Miller, senior vice president for global marketing and research at the National Cattlemen’s Beef Association (NCBA). “We have seen a perfect storm — years of drought that tightened supplies and incredible demand. Producers throughout the industry have welcomed the return to positive margins and are enjoying the headlines.
“However, 2015 is shaping up to be a fantastic year from a price standpoint for all classes of cattle, though it remains to be seen whether new records will be made.”
Stratospheric beef prices apparently have not dampened demand, which remains extremely strong in the U.S. and the world, Miller continued. “In the face of record prices, fewer supermarket features are to be expected, but retail sales are good, and the food-service business also is doing well.”
CHECK THE NUMBERS
Year-to-date, export volume was up 2% and value was up 13%, in USDA’s September supply/demand report. That pegged beef exports for the year at 2.6 billion pounds, up 1% from 2013, while next year’s exports are expected to slip 4% to 2.525 billion pounds because of tighter supplies.
Numbers are tight the world over. The Canadian beef herd — now larger than the U.S. herd — has been pulled down; increased U.S. imports of Mexican feeders, though not a record, are not sustainable in the long run because Mexico has seen drought, as well; and Australia is exporting a record amount of beef because of its drought — also not sustainable.
Globally, USDA projects less than a half-percentage-point increase in world beef supplies this year, with Brazil up 2.5%, the European Union up 1.5% and India up almost 4%. India’s production now exceeds traditional exporters like Australia and Argentina, making it the No. 2 exporter behind Brazil. However, India’s sales are mainly water buffalo, much of which fills a need for lower-priced product in China. By year-end, USDA estimates global beef inventories will have dropped 20% from a year earlier, to 584,000 metric tons.
As is the case in the U.S., the age of animals coming to market in other countries is dropping: Brazil’s marketings have declined from 2 to 3 years to 18 months, and India also is reducing the age of its herd — selling 3-year-olds, then 2-year-olds and now yearlings, industry insiders said.
Expansion in the U.S. is going slowly, added Mark Engler, senior vice president in charge of risk management at Cactus Feeders, in Amarillo, Texas, and head of the family’s ranch operations.
“It has been so dry the past three or four years, there was no retention. If a ranch is now keeping half its heifers, that’s still not expansion.” Heifer slaughter is down only 5% to 6%, not enough to expand—that would take about a 20% reduction, Engler estimated.
Even if expansion got underway in 2014, it will be 2016 before there is any increase in market supplies, NCBA’s Miller pointed out. The fact that all classes of females — including pairs, heifers and older cows — are bringing premium prices suggests producers are trying to expand, he said.
Mike Dee runs a commercial cow/calf operation in Alabama, selling some breeding stock and backgrounding his steers. Last year’s dry weather and high hay prices caused Dee to reduce the number of bred heifers he kept. While he would like to boost numbers again, he’s now balancing growth and high market prices. The day we talked with Dee, he was running a truck of bred heifers to market.
“I hope existing operations will see it [current market] as a chance to invest and improve their herds,” Dee said, but added it’s a hard time for someone to get started in the cattle business. He noted some cattlemen have dropped their numbers, but not many are selling out, despite the good prices. “But with the age of farmers/ranchers, that’s a threat.”
Herd rebuilding is more likely to occur in the West, now that the moisture situation has improved, rather than the Southeast, said Derrell Peel, Extension livestock marketing economist at Oklahoma State University. “The high crop prices of the past few years converted some pastureland to crops, and they are not likely to be converted back.”
The short numbers mean things aren’t rosy at feedyards, Engler said. “There is a shortage of yearlings. Empty pens are a big motivator, but stocking rates per pen are down. Most yards are resigned to running at lower capacity — probably in the 70% to 75% area. Head counts are dropping everywhere, and there has been a distinct move to purchases at lighter weights the past three months.”
USDA’s monthly report showed 20% fewer placements over 700 pounds and 15% to 20% more under 700 pounds, Engler explained. In addition, lots have expanded their parameters, buying more Holsteins, more from Mexico and more “high-risk” Southeastern calves when they can’t get enough native yearlings. Cheaper corn means feedlots can compete with stockers on 400-pound cattle, he said, though recent replacement prices represented a $150 loss on anything being purchased. “And 2014 was just practice for 2015 and 2016 as ranchers try to expand,” he added.
On the other end of the industry’s spectrum, Mike Callicrate, with operations in St. Francis, Kan., and Colorado Springs, Colo., has moved outside the commercial system. He has built a new processing plant as well as a mobile processing trailer to harvest about 40 fat cattle per week that are sold direct to locally owned restaurants, stores and schools on a cost-plus basis.
“If the ranch can keep about 70% of the sales price, that business model should work well,” he said. Callicrate pointed out demand is growing about 20% a year without marketing efforts. “I don’t even look at futures prices anymore. All the knots in my stomach that used to cause are gone,” he said with a smile.