For beef cattle producers who find comfort in routine, the next few years will most likely take you out of your comfort zone. We are entering a time in the industry in which record high prices for cattle and beef will be set, while at the same time some segments of the industry will continue to contract.
The USDA cattle inventory report released in January 2014 showed 29 million beef cows in the United States, down one percent from the previous year. The calf crop in 2013 was the smallest since 1949! This continuing decline has significant impacts on all segments of the industry, from stocker operators to consumers.
One of the major drivers of the lower inventory numbers is the continuing persistent drought in many of the Southern Plains states. The latest drought monitor data shows severe drought conditions in the Texas Panhandle, parts of Oklahoma and Kansas, and much of California. This puts pressure on the ability of producers in the industry to build overall cow numbers.
Over the last six to eight years, increased demand for corn in the industrial sector has resulted in changes in land use in the Midwest and Great Plains states. Land that was once permanently used for forages such as alfalfa, hay, or pasture, is now being cultivated to grow corn and soybeans. This, along with significant increases in feed costs, have caused many producers to reduce the size of their cow herd or exit the business.
The decrease in cattle inventory has trickled down to the feedlot and packing sectors which have operated at less than full capacity for many years. In the last 18 months, two major packing plants have closed (National Beef in Brawley, Calif., and Cargill in Plainveiw, Texas) and low rates of capacity utilization in the feeding sector have resulted in some feedlot closures as well.
In the consumer sector, the combination of drought, high corn prices, and low cattle inventory numbers have all contributed to higher prices at the meat counter and a somewhat lower per capita rate of consumption. However, the outbreak of porcine epidemic diarrhea virus (PEDV) is another piece of the puzzle that has further complicated the retail market for beef. Normally, consumers might substitute pork for higher priced beef, but PEDV has caused pork supplies to be extremely tight as mortality rates in piglets are extremely high when this virus hits.
Despite the increase in beef prices, demand for beef has remained relatively steady due to export markets that continue to add value to a variety of cuts and offal. This results in substantial increases in the market value of each fed steer and heifer. Industry estimates indicate the value added is nearly $280 per head for every fed steer and heifer.
The signals are in place for heifer retention to accelerate, but moisture and pasture conditions will be the drivers in the near term. Over the longer term, one can expect additional closures in the feedlot and packing sectors especially in areas of geographic overcapacity. If you are in an area impacted by drought, all of these factors will mean tough choices related to further cow herd reductions or expensive feeding programs. If you are in an area that has grass, the prospects for record profitability will mean good economic times. There is considerable excitement in ranch country as the price expectation for fall delivery of the 2014 calf crop is quite high. Making wise strategic expansion and business management decisions will mean additional profits in these volatile times in the market.
Stay tuned for further changes in an already dynamic industry! It is definitely an exciting time to be in the cattle business! ❖