Market conditions are shaping up for a once-in-a-lifetime situation, says Tom Brink with Five Rivers Cattle Feeding, and cattlemen with the right management and genetics may want to capitalize by adding a replacement-heifer component to their operation. Here are 10 reasons, along with a couple of cautions, that lead Brink to that conclusion:
1. It’s good to own a scarce commodity. “Think about the price of gold,” Brink says. “It hit $1,800/oz. not too long ago. Why is that? Gold is fairly scarce.”
If you own a cow today or bred heifer, it’s increasingly a scarce commodity as well, he says. Cow liquidation has been ongoing for years and will continue. As a result, U.S. beef output is falling, causing USDA to project we’ll produce around a billion fewer pounds of beef in 2012 than this year. “Is that going to have some significant market impact on the value of all cattle? It obviously will.”
2. The drought in the South will end. “What’s worse? Having cows and no grass, or lots of grass and no cows? That’s the transition we’re going to see over the next one year, two years, however long it takes,” he says. “We are going to see a transition from people having cows and no grass to exactly the opposite. That’s going to change the dynamics of the demand for females.”
3. Beef demand is rising. JBS, of which Five Rivers is part, tracks wholesale spending for beef very closely. Their numbers show that, so far in 2011, wholesale spending is running somewhere around $100 million a week above last year and recent years. “Now, if this happened on one week, we’d say it’s just an aberration. But it’s been going on all year and shows no sign of stopping.”
4. Beef exports are growing rapidly. Income growth in Asia and other parts of the world is spurring demand for meat protein. Year-to-date exports are up 39%, Brink says, and the interesting thing is that demand for whole-muscle cuts is a big part of that growth. JBS is seeing demand for beef cuts in Middle East countries, for example, that never used to buy anything but offal. “Barring some kind of economic delay, this is going to continue. There’s no reason we won’t see exports up again in 2012.”
5. Calf prices are record-high and likely headed even higher. That’s a pretty good thing if you own cows or are breeding heifers, Brink says, But, as he’s traveled to producer meetings this year, he’s been surprised at the number of people who are afraid the recent run-up in calf prices won’t last. “We don’t believe (prices will fall back) because the fundamentals in the business look very strong. These prices are likely to last and go higher over the next few years.”
6. Bred heifers, even in major drought and herd downsizing, are trading at a premium to bred cows. “Bred heifers used to trade $30-40/animal cheaper. Now they’re trading about $20/head higher,” he says. “I don’t know why that’s happening, but it’s a pretty positive thing if you’re breeding heifers.”
7. There are a lot of very good synchronization programs for heifers. “We have very good tools, we have very good technology, to get those heifers synchronized and set up for AI breeding. So if you’re looking at breeding more heifers, you have some tools that were not as well proven or as well understood 10-20 years ago.”
8. We have great availability of high-quality heifer bulls. There are well-proven bulls that offer a whole lot more than calving ease, Brink says, and the semen is not expensive. Search the catalogs and you’ll find a good selection of proven calving ease sires that provide plenty of growth. “If you’re breeding heifers, it’s amazing the genetics out there today that we didn’t have that many years ago.”
9. Increased availability of byproduct feeds. “While byproduct feeds aren’t readily available everywhere, they’ve been a game-changer in many parts of the country,” Brink says, because they’ve allowed producers to keep high feed costs in line.
Some stocker operators, for example, have moved from buying calves in the spring to buying them in the fall when prices are typically cheaper, then wintering them on distillers grains.
“They can procure their inventory of calves at much lower prices, winter them cost-effectively and then be ready for summer grass.”
He says the same applies to heifer development. “Those byproduct feeds aren’t available to everybody but are out there in quite a few places, especially in the Northern Plains and Midwest. That is available as a tool that can be used to help keep the cost of heifer development down for those in those areas.”
10. The timing looks right. “The heifers that we breed in the next 2-3 years could very easily be the most profitable cows we will ever own. The situation just seems set up in our favor in terms of the positive demand-supply balance,” he says. “We can’t call the turn of the cycle exactly, but we can read the tea leaves fairly well and, if you look at some of the factors, it’s hard to argue with the fact that we’re going to be in a period of price appreciation. Values are strong, and marketability is going to be good for those who have that scarce commodity in a bred heifer or cow.”
Some cautionary thoughts
That said, however, he offers a couple of cautionary thoughts.
“Make certain you have a competitive cost structure,” he says. The keys to being a low-cost producer are to have lower-than-average annual cow costs; higher-than-average reproduction rates; and higher-than-average weaning weights. “You put those three puzzle pieces together and you will be a low-cost producer.”
For example, say the average producer will spend about $500/cow/year. “A high-profit producer, he’s a little bit better than average, so he’s spending $25 less/cow. Calves weaned/cow, the average producer may be around 85%. The high-profit producer is a little better. Maybe he’s running around 88%. Weaning weights, 525 and 540. So if you just are a little better in all three categories, you’re going to be $10-12 lower (unit cost of production on a weaned calf) than that high-cost producer, and $12/cwt. on a 5-weight calf is $60/ head more profitability.”
Then, he says, you have to make sure you’re raising a calf that has some marketability. In the current market, everything has marketability, he admits. “But that doesn’t mean they’re going to all sell at the same price.”
He says he’s often asked what kind of calf Five Rivers is looking for. Brink says their ideal feeder animal is 50-75% Angus; 25-50% Continental influence for some muscle and leanness; and 25% anything else. “That’s a formula that will not cure every problem we have in the industry, but I wish a lot more people would follow that. It’s simple and works in terms of marketability. People will pay more for those kinds of cattle and from a carcass standpoint, those kinds of cattle generally do pretty well.”
Bear in mind, though, you have to use good genetics within those breeds. “But that’s the ideal feeder steer as our feedyard managers have described it.” (For more on Five River’s thoughts on feeder calves click here. To see photos of the cattle Brink describes, click here.
So is now a good time to develop a replacement heifer enterprise? If you look at the cattle side of the question, the picture is pretty friendly, Brink says. If you look at the input part of the puzzle, particularly corn prices, the picture becomes a little more tenuous. “But our opinion at Five Rivers and my personal opinion is that it’s absolutely a great time to not only own cows, but very likely own more cows. That’s if you have a competitive cost structure and you have the right genetics that will ‘value up’ well in the current marketplace.”