The beef-cattle industry is well positioned to successfully compete and thrive given record-high corn and energy costs, says economist Bill Helming.
The president of Bill Helming Consulting Services, Olathe, KS, says record-high corn, soybean meal and energy costs are presenting major challenges, placing significant upside pressure on costs of gain and operating expenses, while exerting downside pressure on margins for cattle producers, cattle feeders, pork producers and chicken companies. And the prospects are high that some of these trends and developments will continue for the next 12-30 months.
But assuming that corn, meal and energy costs remain at recent record-high levels or go to even higher levels for the next 1-3 years, Helming believes the beef-cattle industry (including the cattle feeder) will be able to compete successfully with pork and poultry. Here’s why:
- Pork and poultry have significantly better conversion rates than beef cattle, but both industries are 100% dependent on corn and soybean meal. So, as corn and meal prices go sharply higher, the pork and poultry industries are forced to cut back production in order to be able to pass these increased production costs on to the consumer over time.
The beef industry also faces reduced production in 2009 and 2010, but the reduced supplies of beef, pork and poultry should bring higher prices for fed cattle, hogs, chickens and turkeys.
- The beef industry isn’t nearly as dependent on corn or soybean meal as pork and poultry producers. For example, given today’s sharply higher corn prices, cattle placed on feed will consist heavily of yearling steers and heifers weighing 700-900 lbs. after longer feeding periods on grass, silage and other roughages.
When finished, these cattle will go to the packing plant with 40-45% of their finished weight on corn and other feed grains, and 55-60% on grass and other roughages. In addition, many cattle feeders will use distillers-grain coproducts from ethanol plants to the extent this feed product is available and is competitively price. About 32% of the corn that is used to process and produce ethanol is available and used by the cattle-feeding industry as a byproduct.
Because of the these dynamics, the beef cattle industry will remain very price- and cost-competitive with the pork and poultry industries. Over time, more cattle will be fed with cracked or rolled corn, rather than flaked corn, in order to reduce the growing energy costs of processing corn for fed cattle. The pork and poultry industries don’t lend themselves to using cracked and rolled corn nearly as well as cattle feeders can.
- In addition, 50% of all beef consumed in the U.S. is in the form of ground beef. The demand for U.S.-produced beef generally will remain relatively positive and strong over the next 10 years, and the fact that at least half of all U.S. beef consumed is ground beef will be a supportive and positive factor over that time given our likely economic and financial climate.
- The pork, chicken and turkey industries are essentially fully integrated. This means that substantially higher corn and soybean meal prices either must be absorbed by producers, or passed to the consumer. Doing so realistically requires a significant cutback on production by these industries, which is extremely difficult and time consuming as most of these operations are set up and managed to increase production, capacity utilization and market share.
The beef-cattle industry, meanwhile, is highly segmented and fragmented between cow-calf operators, stock cattle operators, backgrounding and growing operations and cattle feeders. For many reasons, the beef-cattle industry will not integrate, which actually works to the advantage of the cattle-feeding sector, which can drop the prices it pays for yearling and feeder cattle. This gives the cattle feeder, and cattle feeding industry in general, a significant competitive advantage over the pork and poultry producer when grain costs go up sharply, as they have over the past 12 months.
In the case of the beef-cattle industry, the adjustment in placing fewer lightweight cattle on feed in response to the sharply higher corn prices (putting more weight on feeder cattle with grass and forages before they are fed a high-energy corn ration) is what happens.
These trends will continue to keep feeder cattle and fed cattle prices higher than what they otherwise would have been without the sharply higher corn prices that we have now and will likely continue to have for the next several years. These changes and developments result in a declining calf crop and significantly fewer cattle being placed on feed, which should support calf prices.
-- Bill Helming Consulting Services