As we enter the “new normal” for the U.S. beef industry, I encourage ranchers to think about the overall economics of the ranching sector. To facilitate this thinking, here are some thoughts on the short- and long-run economics of the beef cow sector.
Beef cow numbers have fallen for 13 of the last 15 years. Just as the sector was poised for an expansion in the mid 1990s, the biofuels era kicked in. Since 2006, beef cow numbers have continued to trend downward (Figure 1). Downward trending beef cow numbers ensures less feeder cattle in the future.
Increasing exports are currently generating favorable cattle feeding economics. The last big run of cattle feeding profits was in 2003. We’re currently feeding heifers instead of breeding them. Without an increase in the number of replacement heifers, the nation’s cattle numbers will continue decreasing.
Figure 2 presents my current feedlot projections for placing both 550-lb. and 750-lb. feeders on feed in mid-February 2011. Today’s corn-price projection delivers feed costs of gain (COG) in the 73-80¢/lb. range. Current numbers suggest a loss for feeders placed in February 2011.
The third column in Figure 2 depicts my calculated profit from slaughter steers harvested in mid-February 2011; these steers are calculated to make $166/head profit. A cattle feeder making this kind of money feeding cattle likely will want to plow some of this money back into feeder replacements – even heifer feeders if he has to.
Cattle feeders are increasing placements of younger feeders, which are the most available, compared to a year ago (Figure 3). Younger feeders also use feedlot space longer. Eventually, some feedlots will have to back off due to a shortage of feeder cattle. Don’t be surprised if the beef industry shuts down some processing facilities due to lower cattle numbers. The implications of the new normal for the total beef industry are significant.
Many ranchers have been forced to sell every heifer born the past few years just to meet cash flow needs. High calf prices are generally needed for ranchers to be able to hold back extra replacement heifers, and I don’t think ranchers will expand their herds until they’re generating favorable cash flows and even economic profits from their existing cowherds.
My numbers suggest that ranching economics is about to change (Figure 4). Ranching profits are getting better, as beef cow profits turned up in 2010 and are projected to reach an 11-year high in 2011. Such higher profits should put extra cash in ranchers’ pockets, which should stimulate them to hold back added replacement heifers.
Cattle feeders be aware, however. A national herd expansion will reduce the number of feeder cattle to an even lower number. Eventually, more feeder cattle will become available, but the key is to keep your feedlot operating and cash flowing until then.
Figure 5 summarizes my current projections for 2011 calves sold at weaning, as well as for cattle feeders growing and harvesting these 2011 calves. This projection suggests that selling at weaning may be the best ranch marketing alternative for 2011 calves. Even with today’s strong beef exports, the projected high total COG on feeding 2011 calves leads to a projected harvest loss. Retained ownership may not be the way to go with your 2011 calves.
Regarding the long-run perspective on the beef cow sector, I want to share some preliminary data from some research underway in North Dakota. This work suggests that western North Dakota operators with both beef cows and grain farming enterprises have been experiencing some interesting and surprising long-run trends.
Figure 6 depicts the average total farm cash income for western North Dakota diversified Farm Business Management farms for the 1994 through 2009. In general, total cash income has trended upward an average of $16,200/year over this 16-year period.
The analytical power of a trend line analysis is to note those years where the actual total annual cash incomes were above the trend line and those years where the annual cash income is below the trend line. For example, 2008 was well above the trend line, but 2005 and 2006 were below. In general, I was surprised at how steady the growth in total cash income was over this 16-year period.
These operators were quick to remind me that operating costs also went up substantially in the last 16 years, which is confirmed by the data (Figure 7). In fact, the trend line went up an average of $14,209/year over this 16-year period.
Years 2008 and 2009 stand out as two years of substantial cash cost increases above the trend line. Years 2004, 2005 and 2006 stand out as years where total cash expenses were below the trend line.
Net cash income, the difference between total cash income and total cash expenses, is what really counts. Figure 8 suggests that average net cash income trended upward $1,931/year over the 16-year period. The variation around this trend line, however, was substantial.
For example, 2009 was way below the trend line and was the worst cash-flow year over the 16-year period; 2008 was substantially above the trend line. Years 2004, 2005 and 2006 also had net cash income above the trend line.
The cash flow volatility during 2007, 2008 and 2009 challenged even the best managers. The biofuels era (2006 to present) is putting cash flow pressure on these diversified farmers.
An interesting point is that the average net cash flow for 2007-2009 was below the trend line, equaling back to the 2001 average net cash income level. These operators truly experienced a cash flow shortfall over those three years.
These North Dakota farmers are very concerned as to where there annual net cash flow is going. In fact, this is the focus of a special North Dakota research study that is currently underway.
I draw two key conclusions from this long-run analysis.
Cash flow has to get back above trend line before beef cow producers will seriously consider expanding their beef cow herds.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or email@example.com.