It’s too easy to get lost in chatter about the current tight cattle supplies, although it’s understandable. After all, the nation’s beef cowherd is the smallest since World War II. Input costs are running ahead of average net profit opportunity. Even with record-high cattle prices, any notion of expansion this year seems irrational, though individual and regional opportunities do exist.
And then, a wave of the tornadoes shook the South, wildfires ravaged parts of Texas, widespread flooding hit prime farm ground in the Mississippi River basin, and exceptional drought continues to parch Texas and wide swaths of Oklahoma, New Mexico, Louisiana and Arkansas.
“Just about everything has been affected, from supply impacts to demand inputs to input market impacts,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.
“Persistent drought conditions in the southern Great Plains can easily overwhelm any herd expansion that takes place in other areas, particularly if beef cows continue to move out of the Midwest.”
At the same time, late planting promises to keep feed prices high and volatile.
“Since March, the December corn futures contract has traded as low as $5.50/bu., and as high as $6.80. That volatility is likely to continue into the summer and early fall as it appears we’ll have a later planted crop that could be at risk of early frost damage,” explains Dillon Feuz, Utah State University agricultural economist, in the May 11 In the Cattle Markets newsletter. “With a $1/bu. swing possible in corn prices, feeder-cattle prices could also be very volatile. Calf prices could change over $10/cwt., and yearling prices could change $5-8/cwt., depending on the weight of the yearling.”
Bullish supply fundamentals and price volatility make it easy to overlook how precarious industry economics would be if not for current consumer demand, especially internationally.
For March, U.S. beef exports posted a 65% increase in value compared to the prior year, according to the U.S. Meat Export Federation (USMEF); exports accounted for 15% of beef production and an export value of $205.40/head of cattle slaughtered.
For the first three months of 2011, beef exports were up 32% in volume and 53% in value. That equates to 13.4% of production with a value of $186.58/head of fed slaughter.
“We are seeing rebounding global demand for high-quality U.S. red-meat products, particularly as consumer trust recovers in key markets like Japan and South Korea,” says Philip Seng, USMEF president and CEO. “Certainly, we still are facing obstacles in the international marketplace, such as China’s ban on U.S. beef, Mexico’s NAFTA-related tariff on U.S. pork, technical issues in Taiwan and age restrictions on beef exports to Japan. But, even without the resolution of any significant access issues, we’re finding increased opportunities to expand market share for U.S. red meat products.”
Likewise, analysts with the Livestock Marketing Information Center point out weekly steer byproduct values reached a record-high of $13.72/cwt. (live steer basis) the week of April 22. On a monthly basis, steer byproduct values have increased each month since January 2010, reaching a record $13.35/cwt. in March, which is $3.25/cwt. higher than a year earlier. So far this year, the byproduct value is averaging 33% above last year.
Continued traditional focus on supply and demand fundamentals, however, may mean missing the point entirely when considering the emerging new cattle and beef markets.
“Producer profitability will determine the amount of protein available to be consumed in the future,” Jim Lochner, Tyson Foods’ chief operating officer, told the J.P. Morgan Global Protein Conference this spring. “That concept hasn’t changed; however, the drivers of profitability and production have changed.
“The old paradigm was that profit ability and production are driven by domestic demand. The new paradigm is that they’re largely driven by grain costs and exports,” Lochner said.
Think of that.