Meat Matters

Packers Wrestle With How To Add More Value To Cattle

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Rebuilding of the U.S. beef herd hasn’t yet begun; when it does, it will take even more heifers out of the feeding and slaughter mix. Cattle supplies in the Southern Plains will be particularly tight.

What a difference a year makes when it comes to corn prices. By now, you have a good idea of just how large last year’s record U.S. corn crop is, and how prices will look this year. At press time in late November, cash prices were 42% lower than the same week in 2012. Whether it was in Omaha, NE, or Dodge City, KS, prices were in the $4.14 to $4.30/bu. range.

Prices seemed unlikely to drop below $4 unless the crop is bigger than expected, and exports and ethanol usage decline. But even at the November prices and with live cattle prices around $130/cwt., cattle feeders were enjoying solid feeding profits after 18 months of massive equity erosion. One can only hope that cattle feeders don’t bid away their future profits by paying more and more for replacement cattle.

It’s going to be difficult, however, for feeders to keep a lid on replacement costs. The shrinking U.S. cattle herd has left the feeding sector with at least 35% overcapacity. Some feedlot operators have responded by closing yards or turning them into backgrounding operations. But it seems inevitable that more will close in 2014 and 2015.

Rebuilding of the U.S. beef herd hasn’t yet begun; when it does, it will take even more heifers out of the feeding and slaughter mix. Thus, cattle feeders and fed-beef processors both face the prospect that cattle numbers won’t start increasing until 2016.

The Southern Plains will face the tightest cattle supply for two main reasons. Drought ravaged Texas, Oklahoma and New Mexico cow-calf herds in 2011 and 2012. These three states alone lost 1.62 million beef cows in these two years. Even if cow numbers stabilized there last year, it might be at least another year before pasture conditions sufficiently improve to encourage cow-calf producers to start rebuilding their herds.

There also are other reasons why herd expansion might be extremely modest, both in the Southern Plains and nationally. The average age of ranchers is edging higher, and so is their aversion to risk. Several of my rancher friends are in their 70s, and although they’re among the biggest and best operators in the business, they are opting to reduce their cow numbers.

Another reason is that, as in 2013, feeder cattle prices might be so attractive that intentions to hold back more heifers will once again give way to selling that animal for a record-high price. Who can resist putting money in the bank instead of having to carry that heifer for 18 months or more before she has a calf?

 

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Cattle numbers will also be the tightest in the Southern Plains due to the huge reduction in Mexican feeder cattle coming north. Northern Mexico was ravaged by drought in 2011 and 2012, two years that saw the second- and third-largest-ever annual numbers (1.447 million and 1.421 million head of cattle, respectively) come north.

Not surprisingly, imports from Mexico by mid-November 2013 had fallen 38%, or by just over 476,000 head. If this percentage decline held through the last six weeks of 2013, Mexican feeder imports for the year will be down 553,000 head compared to 2012.

The decline in the supply of homegrown and Mexican calves claimed its first packinghouse victim last February, when Cargill idled its Plainview, TX, fed-beef plant. The plant was capable of processing just over 1 million cattle annually, so its closure briefly redressed the imbalance between supply and processing capacity on the Southern Plains.

However, an imbalance remains, and plants in the region will likely have to run reduced hours in 2014. And they will have to find even more ways to get more value from each carcass to make up for the economic cost of underutilization. That’s exactly what feedlot operations will have to do as well.

Steve Kay is editor and publisher of Cattle Buyers Weekly (www.cattlebuyersweekly.com). See his weekly cattle market roundup each Friday afternoon at beefmagazine.com.

 

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Steve Kay offers a unique, big-picture perspective on the North American meat and livestock industry.

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Steve Kay

Steve Kay is editor and publisher of Cattle Buyers Weekly (www.cattlebuyersweekly.com ) subscription newsletter, the number-one marketing and business newsletter for the meat and livestock...

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