Cattle Economics

Economic Signals Are In Place For Restocking To Begin

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Though cow-calf producers aren’t yet generally in an expansion mode, the first sign of such intentions came in USDA’s latest Cattle Inventory report.

“The economic signals are in place for restocking to begin this year,” says Randy Blach, CattleFax CEO. “All we need now is a little encouragement from Mother Nature.”

Between snugger cattle numbers, relative to feedlot and beef packing capacity, and anticipated continued strong U.S. beef export demand, Kevin Good, CattleFax analyst, expects calf prices to gain another 15% this year for an average of $175/cwt. (550-lb. steer). That equates to an average increase of almost $157/head. He sees a seasonal price range of 15%, from $162-$188/cwt. with the highs coming in the spring.

According to the Jan. 1 USDA Cattle Inventory report, the beef cowherd is the smallest since 1962. Last year’s calf crop was the smallest since 1950.

Speaking at the CattleFax 2012 Industry Outlook in February, Good added that feeder cattle prices (750 lbs. steer) should average near $150/cwt. in 2012. That would add up to about $145/head more on average. He also expects seasonal feeder cattle prices to trade across a 15% range, from $139/cwt. to $160/cwt.

Good sees the fed cattle price average at $122/cwt. in 2012, with support at $110-$115/cwt. and resistance at $130-$134/cwt.

See Table 1 for price estimates from the Livestock Marketing Information Center (LMIC).

Though cow-calf producers aren’t yet generally in an expansion mode, Glynn Tonsor, Kansas State University agricultural economist, says the first sign of such intentions came in USDA’s latest Cattle Inventory report. It indicated a 1.4% year-to-year increase in the number of beef replacement heifers.

Tonsor cautions that the higher heifer retention rate needs to be considered relative to the previous year’s historically paltry number.

During February’s inaugural Beef Cattle Economics Webinar – co-hosted by BEEF magazine, Tonsor said projected historically high returns per cow over cash costs – due to the nosebleed-high prices mentioned earlier – will likely be enough to entice some producers to begin expanding.

Using LMIC data, Tonsor says the average return over cash costs was about $80/cow in 2011. It’s estimated to reach $150/cow or more in 2012 and 2013.

Despite shifting drought conditions, Blach expects cattle inventory numbers to decline slightly in 2012 and bottom in 2013.

Tight supplies of cattle and beef will be compounded by continued growth in the export markets. Blach adds that an increase in average carcass weights will partially offset the decline in inventory numbers.

In general terms, CattleFax analysts say cow-calf producers are in the driver’s seat this year with anticipated record-high cattle value that should more than offset increasing input costs. They explain profit margins should continue positive for stocker producers and backgrounders, but with narrower margins than the last couple of years.

Another constant is that, in all instances, market volatility and equity requirements have reached gut-wrenching levels. CattleFax predicts the fed market in 2012 will vary by up to $300/head from high to low. The daily trading range for spot live-cattle futures in 2011 was $1.35/cwt., or $15-$20/head.

As for equity, the CattleFax folks say that operating a cow-calf operation in 2009 required 60% more capital than in 2000. Assuming 20% equity to feed a calf, the required investment has grown from $170/head in 2000 to more than $300 today.

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Wes Ishmael provides tightly focused analysis and commentary on specific beef quality and marketing issues of practical importance to beef producers.

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Wes Ishmael

Among the industry’s most insightful thinkers, Wes Ishmael concentrates on industry price and market perspectives for BEEF magazine. Along with his monthly “Cattle Economics” column...

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