Cattle Economics

Shrinking Cattle Numbers Could Lead To Permanent Downsizing

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With pasture cost of gain penciled in at $60/cwt., the value of gain is staggering.

Even folks with a bent for finding the dark cloud behind every silver lining would be hard-pressed to underestimate the game-changing nature of the current drought.

Feedlot pens were beginning to stand vacant and ethanol plants were going dark before the Aug. 10 World Agricultural Supply and Demand Estimates confirmed what the market had anticipated. Best-case scenario, this year’s drought-hammered corn crop will come in around 10.8 billion bu., 13% less than the previous year’s crop, the least production since 2006 on the lowest yield (estimated at 123.4 bu./acre) since the 1995-06 crop year. Corn contracts closed at $7.98-$8.12/bu. through the new crop year on the day the report was published.

As corn prices rocketed ahead through July, rationing demand, Stan Bevers, Texas AgriLife Extension agricultural economist, says calf prices declined $35/cwt., and feeder prices $20.

Feedlot cost of gain was commonly running $1.35-$1.45/head on cattle placed in July. Cattle feeding net returns estimated by the Livestock Marketing Information Center for July were nearly a negative $325/head, the steepest in the history of that series, according to Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

As forage conditions deteriorated, calves began moving to market earlier than normal, just like last year.

Peel expects the beef cowherd to be 1.5-2.0% smaller on Jan. 1, 2013, compared to 2012. But he wouldn’t be surprised if it was 3% smaller, as it was when this year began.

Historically high harvested-feed costs means that adding more weight between weaning and the feedlot represents significant opportunity for pure stocker operators, backgrounders with access to reasonably priced rations, and cow-calf producers with some forage.

Bevers runs a budget for fall stockers on wheat pasture. With pasture cost of gain penciled in at $60/cwt., the value of gain is staggering.

Peel explains value of gain averaged in the 55-60¢ range between 1992 and 2006. It has hovered around $1 since then, and well north of that in many cases.

“I think the drought may be exaggerating that a bit currently, but I think the overall incentive to put weight on cattle outside of the feedlot will continue to be there going forward,” Peel says. “It means a lot of opportunity for people who control forage.”

Currently, the collapsing price rollback between some weight classes offers added opportunity.

Moreover, if there was ever a time to exploit every technology and management practice that yields more return than cost, it would be hard to argue against today.

Even with high prices, John Rakestraw reminded producers at the Tri-State Beef Conference in Abingdon, VA, recently that purchase and selling decisions are a choice. Bargaining for just a little less on one and a little more on the other can make a significant difference. Rakestraw is CEO of Colorado-based Agra Holdings.

“If you’re a cow-calf operator, do what you can to hold on,” Bevers says. “You will be rewarded for it; it may just take a year or two longer.”

It’s that supply thing again. Short cattle numbers should pressure calf and feeder prices higher once this year’s drought-forced early calf movement and cow liquidation clear the market. Both Bevers and Peel said the first week of August that there were indications that price lows for calves and feeders had been established for the year. They both point out that even with the declines, calf and feeder prices had yet to fall beneath prices of the previous year.

Consumer beef demand at higher prices becomes a key wild card for cattle prices. Longer term, questions surrounding the industry’s infrastructure loom larger.

Since BSE was discovered in the U.S. in 2003, short cattle supplies have insulated the industry from market shocks. Now, those same short supplies are exposing the industry to greater risk for permanent downsizing.

Discuss this Blog Entry 1

Keydrick (not verified)
on Sep 24, 2012

HHIS I should have toughht of that!

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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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