Market Advisor

Is There A Game Change Just Ahead For Ranchers?

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The quickest way to take advantage of today’s strong feeder calf prices is to hold off selling calves at weaning, and grow out your calves to heavier than normal weights.

The beef market is changing and ranchers must critically examine their business plan moving into the next cattle cycle.

For 30 years prior to 2006, the beef industry operated with corn prices in the $2-$3/bu. range. During that time, the big discussion was how much corn was in government storage and what would be the release price. With relative steady corn prices, producers had a good feel for cost of gain (COG), which allowed them to focus management attention on the cattle cycles’ impact on cattle prices and drought’s impact on forage production.

Ethanol altered that scenario in late 2006, and corn prices became much more volatile for the next seven years (Figure 1). Corn prices rose into the $5 to $8/bu. range, and record corn prices were set in 2007, 2008, 2010, 2011 and 2012, with a near-record price in 2013.

Study the statistical trend line in Figure 1 and note the years when corn price was above or below that trend line. The result was that cash grain farming skyrocketed after 2006, drawing pasture and forage land into corn production, and prompting the liquidation of many beef cowherds.

In early 2006, I predicted another 10-year cattle cycle with increasing cow numbers. In the last half of 2006, however, when ethanol came on the scene in a big way, the game changed. Instead of increasing cattle numbers, the cattle cycle was broken and cattle numbers headed down (Figure 2).

Since late 2006, COG rose rapidly and became all-critical to economic survival. Growing weaned calves on grain generally was uneconomical. And volatile corn prices made it difficult to predict COG and thus to plan any profitable multiple-year marketing strategy. Note that the last cattle cycle peak was in 1995 and the industry is now in the 14th year of decreasing cow numbers.

After the 2006 game change due to the rise in grain prices, producers’ emphasis changed to growing weaned calves on forages, rather than on grain. That high COG, coupled with a major drought in 2012, helped continue the downward trend in beef cow numbers, which today are at a 60-year low (Figure 2).

Of course, fewer cows produce fewer calves, and today’s tight feeder calf numbers are impacting the beef industry’s infrastructure. The result is that some feedlots are closing while others are operating at lower capacity. Packers are also feeling the numbers pinch, as Cargill closed its Plainview, TX, plant last year, and National announced its closure later this spring of its Brawley, CA, beef processing plant. 

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Though it’s unlikely we’ll see $2-$3/bu. corn, USDA is projecting $4-$5 as the new “normal,” and the corn futures market reflects this range well into 2016. The result is that, once again, economists are predicting that ranchers will increase beef cow numbers. 

Does this signal that it’s time for another producer game change? What will be the “production game” in an era of $4-$5/bu. corn under normal growing conditions? Can growing calves on grain once again compete as a profitable marketing option?

As ranchers begin to expand by holding back heifers for breeding, the feeder calf supply will continue to decrease. This should fuel added competition by feedlots for cattle placements. This, in turn, will spur producers’ intentions to expand.

However, the speed of expansion is limited by the biology of the beef cow. Each heifer held back will be at least two years old before she bears her first calf.

The traditional cycle will return

Based on these trends, I predict that the traditional cattle cycle of 9-11 years will return. Based on past historical cattle cycles, we’ll spend about five years building the national herd, and roughly the next five years after that to take it back apart, only to start the whole process over again. In the meantime, national droughts will alter this process whenever a drought occurs.

The quickest way to take advantage of today’s strong feeder calf prices is to hold off selling calves at weaning, and grow out your calves to heavier than normal weights. Current feeder cattle markets are rewarding producers who grow calves to heavier weights.

My mid-March price analysis confirms strong prices for all feeders (Figure 3, red price line). Figure 3 also depicts my calculated statistical price line for mid-December 2013 (yellow line). Most of the price premium since December 2013 has come on lighter-weight feeder steers, but heavier-weight feeder prices are also record high. 

This month’s mid-March price analysis shows 800-lb. steers at $175/cwt.; 850-lb. steers at $168; 900-lb. steers at $162; and 925-lb. steers at $155/cwt. My 2013 backgrounding budgets for high rates of gain are the most profitable. Southern Plains cattlemen marketing heavyweight wheat-pastured cattle in March 2014 are enjoying the record prices.

 My calculated feedlot profits for March 2014-finished cattle are at or near record levels for finished cattle. Feedlots making money appear to be willing and able to bid aggressively for replacements. I predict that heavyweight feeders will remain favorably priced for the next several years due to excess feedlot capacity.

The game change for this year, and for the next few years, is to market heavier backgrounded feeder cattle. This marketing strategy should work to ranchers’ advantage for the next several calf crops.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Kuna, ID. Reach him at 701-238-9607 or harlan.hughes@gte.net.

 

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Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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