It’s a busy time of year for the beef industry… and I’m not just talking about calving season! January and February are always filled with meetings and gatherings across the U.S., including large events like the National Western Stock Show and National Cattlemen’s Beef Association Annual Convention.
While attending these events this year, it was easy to get a sense of what’s going on in the beef industry, and some key underlying trends occurring in the industry. It appears that there are three major issues that are redefining how U.S. beef cattle production will occur in the 21st century. These issues include:
1) Outrageous feed costs,
2) A need to differentiate,
3) New ways to market calves
Outrageous Feed Costs
I hate to say it, but the current outrageous costs of all feedstuffs, at least in relation to historical averages, are here to stay. This was the first thing on everyone’s mind this winter, including prices for both grains and forages.
There is a huge demand for corn, and not just in the U.S. Over 3 billion bushels of corn (about 25% of U.S. production) are being used by the ethanol production industry, which is continuing to expand. In addition, U.S. corn exports are huge (about 2.5 billion bushels) due to a weak dollar.
Unfortunately, during 2008 this huge and growing demand will be matched with fewer acres planted into corn vs. 2007. Continued high corn prices will result, and pose a large risk to cow/calf producers. For instance, a $1/bu increase in corn decreases a feeder calf’s value by at least $10/cwt.
According to Cattle-Fax, there has been a substantial increase in the costs for several beef industry inputs since 2000. This includes increases of about 100% for corn, 60% for hay, 120% for pasture, and 150% for fuel. However, during this same timeframe feeder steer price only increased about 23%. In total, cow input costs have increased $150-200/cow over past 5 years.
Looking to the future, it will be crucial for cow/calf producers to focus on being low cost. This can be done by reducing feed and overhead costs, including equipment and capital outlay.
Grazing land costs (both purchase and lease) will continue to increase, particularly since some grazing lands will be transitioned into grain production. Ultimately, beef cows will be forced onto more marginal grazing lands (which are unlikely to be farmed), requiring more intense management of supplementation programs to meet cow nutrient needs.
Make Your Product Unique
It will become increasingly important for cow/calf operations to differentiate their product (calves, yearlings, or fed cattle). To overcome elevated costs, extra effort must be made to produce more than a commodity product.
While other major beef producing countries like China and Brazil are increasing their production of low cost beef, the U.S. must focus on producing high quality grain-fed beef. The U.S. cannot compete globally on cost, but could cash-in on robust global demand for beef driven by wealth being generated in several Asian countries.
Within the U.S., regions of the country are being forced to differentiate their calves in order to overcome the growing gap between local calf price and calf price in the Cornbelt, where most cattle are fed. Historically, this price difference was equal to the cost of cattle transportation. However, the difference now exceeds freight particularly in the Southeastern and Northwestern U.S.
Luckily, opportunities to add value to feeder cattle have never been greater. Cattle marketed along with historical performance data for feedlot and carcass traits can return an additional $2-5/cwt, according to Cattle-Fax. Further, cattle with an inherent ability to marble can return huge profits. For instance, from 2003-2007 USDA Choice cattle returned about $80/head more than Select. More amazingly, if cattle graded Prime, they returned over $200/head more than cattle that graded Choice (Cattle-Fax data). Similarly, marketing healthy calves that were preconditioned can return $4-8/cwt and calves eligible for “natural” or premium branded beef programs and alliances can return $3-7/cwt.
Documenting the age and source of calves so that they are eligible for export to Asian countries can add $10-25/head to a fed steer’s value in today’s marketplace. However, when the Japanese and Korean markets become more accessible to U.S. beef, it is possible that $100-175/head in additional value may be added to every fed steer. With the current weak U.S. dollar, there is a tremendous opportunity for massive exportation of U.S. beef.
In this time of high input costs, it is important for cow/calf producers to add value to their product by meeting the demands of the marketplace – grain fed, highly-marbled, and differentiated beef that has a story behind it.
Manage and Market a New Kind of Calf
The days of profitably selling conventional “weaned calves” may be coming to an end. Stockering or backgrounding calves (adding weight via low-cost grass pasture or forages) is becoming more common, particularly by cow/calf operations after weaning.
Incorporating a period of post-weaning calf gain onto a cow/calf operation can add gain for as little as $0.35-0.40/lb vs. $0.80-0.85/lb in a feedyard. It is becoming increasingly important for calves to be as heavy as possible prior to entering the feedyard, in an effort to reduce total cost of gain while on feed. However, it is possible that the supply of grass available for stocker operators may become more limited if grazing lands are turned into grain production.
Ultimately, cow/calf producers will need produce and sell heavier calves. This does not mean that calves should be heavier when weaned from the cow (by using high growth bulls), but rather that more weight should be added after weaning but prior to marketing. Keeping calves around longer can also enable the preconditioning of calves, including vaccinations and bunk/waterer training. Since feedyards don’t have enough labor to manage newly-weaned calves, you will receive more for your calves if they are healthy, heavy, and ready to gain when they reach the feedyard.
The Bottom Line
There are fewer small cow/calf producers in the business today than 20 years ago, as evidenced by an increase in the average herd size from 33 to 43 cows. And, increasing costs, more risk, and a nationwide push to plow up our grassland base in favor of grain production are making it difficult for many small producers to remain profitable and in the cow/calf business.
As a result, cow/calf producers need to focus on three key areas: 1) be a low-cost by reducing feed costs, 2) differentiate, add-value, and de-commoditize to your cattle, and 3) add weight to your calves after weaning. Coupled with this, cow/calf producers should also embrace more risk management to protect themselves from price risk for both inputs (e.g. forage cost) and outputs (e.g. calf price), particularly if they are unable to withstand the large amount of volatility in today’s markets.
Dr. Jason Ahola is an Extension beef specialist with the University of Idaho. Contact him at firstname.lastname@example.org or 208-454-7654.