Supply, demand drive cattle prices up
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“It’s about damn time.” Dennis Hanson said, of current cattle prices. Hanson has owned Fort Pierre Livestock Auction in South Dakota for over 40 years so he has seen many ups and downs in the cattle market. “We’re finally getting our market back since country of origin labeling was taken away nearly 10 years ago,” he said.
Basic economic principles point to a lower supply of cattle and a strong demand for beef behind the rising prices, with markets indicating that steer calves are expected to bring upwards of $1,600 per head this fall. Cattle producers are looking at larger gross returns per head than they have seen since 2014, nine years ago, and likely the highest dollar amount per head ever, but profit margins may still be narrow for a variety of reasons.
Heather Gessner, South Dakota State University Extension field specialist in livestock business management said that current markets will lead to many positives across the cattle industry. While high prices do indicate profits for the individual producer, she said that profit margins will vary from one individual to the next. “There may be producers out there recording record high profits,” Gessner said. “However, many of the animals currently going through the market system were fed high-priced corn and hay, thus increasing the input side of the formula. So, while those animals are bringing home large paychecks, they were also fed expensive inputs. That offset may keep profits good, but not record high.” Gessner said that because feed costs represent a majority of expenses for cattlemen, backgrounders, and feeders, feed input prices greatly affect the profit realized by each segment.
SHORT CORN CROP
Recent reductions in the corn and grain market have provided some opportunities for the feeding side of the industry as they create their fall and winter feed ration and budgets. Matt Dierson, agricultural finance professor and risk and business management specialist at SDSU, said that while corn prices have dropped, this year’s crop is not looking like it will be strong enough to see them go significantly lower.
“I’m not sure where a great corn crop is right now,” he said. “Maybe Iowa, Illinois and Indiana are good in spots, but certainly not the Dakotas, Minnesota and Nebraska. We’ve seen mixed results throughout the growing season; it’s been tough in the northwestern part of the Corn Belt.”
Drought conditions across many states in cattle country have driven herd reductions and liquidations over the past three years while simultaneously driving hay costs up. Many areas have seen some drought relief this year, but some areas are still suffering.
“South Dakota was a little bit better coming into this year,” Dierson said. “We needed a good crop to give us additional feed supplies for expansion. If you’ve got hay or can source it locally you will be in good shape and might have good year. If not, that will affect profits.”
Dierson said that while record high cattle prices are good news for cattle producers, they do not directly translate into record high profits.
“Due to recent drought years and high hay and feed costs, most producers have more money already invested into their cattle,” he said. “As pastures west of the Mississippi have improved from a year ago hay has softened a little bit in price, but we are still guessing at this point how much hay is out there until our August crop production report comes in. It will take a huge bumper crop of hay nationally to take the pressure off.”
DECLINE IN NUMBERS
Gessner said that it’s hard to escape the Economics 101 supply and demand model.
“When all segments of the beef industry are examined, there is a decline in the number of cows in the herd, all the way to the number of animals on feed and being processed each week,” she said. “A reduced number of animals results in fewer pounds of beef available to cover the various marketplace demands.”
Dierson pointed to recent data in his Mid-Year Cattle Report published at the Livestock Marketing Information Center, with inventory of all cattle and calves at 97.3 percent of the total at this time last year. This includes cow-calf pairs, cattle in feedlots and dairy animals. One factor of note he pointed out was very few in the category of “other heifers.” This indicates that there is little short-term flexibility for expansion.
“The bottom line behind the high cattle market is limited numbers of cattle,” he said. “Across the entire western half of the United States, those heifers that aren’t replacements have gone to feedlots already.”
Reduced stocking rates due to recent drought years will also affect individual producers’ profit margins this fall.
“Producers coming out of drought may only be stocking 75 percent of their normal numbers which translates to selling only 75 percent of their normal calf crop,” Dierson said. “You have to spread your fixed costs out over that. Your tractor, baler, fencing equipment costs have not changed. In general, many ranchers in the western half of the U.S. will continue to have high or higher fixed costs. That stresses profitability, but doesn’t wipe it out.”
Monty Lesh is a rancher, real estate agent and former banker from Miles City, Mont. He is on the Montana Stockgrowers Association board of directors representing the southeastern district. He said that strong demand for beef combined with supply numbers at 2014 levels or lower are a couple of factors driving the market.
“We saw a lot of liquidation in this part of the country in 2021,” he said. “Drought in the southwest and southern plains also forced herd reductions in those areas. Not a lot of people held back replacements; the combination of dry years, grasshoppers and high feed prices have been a limiting factor on breeding heifers or keeping cows. A lot of people are under-stocked in our area, not a lot of heifers were kept to be bred.”
Lesh expects that to change over the next year.
“We’ll probably see a lot of heifers retained to be bred,” he said. “I’ve been watching video sales the last few weeks and there are four steers for every heifer for sale. In our own instance, we forward contracted our steers for more than I have seen in my life and held our heifers. We normally hold on to our heifers to breed for our own replacements and sell as bred heifers, but it has been tough the last couple of years because of our feed and grass situation.”
Matt Stockton, University of Nebraska-Lincoln professor of agricultural economics, works at the West Central Research and Extension Center at North Platte. He described the current market situation as a juggling act for producers, and said that profitability will vary widely from ranch to ranch.
“Producers need to keep their eye on the ball,” he said. “We know what’s going to happen, everyone will sell as many as they can to take advantage of the high prices. At the same time, retention of heifers for herd growth will have people competing more for pasture and costs will escalate. In the cattle business it’s good to get profits while you can. Some areas are still suffering from drought and high hay prices, ranchers have a lot of cost in their cows coming into this fall.”
Stockton encourages ranchers to be conservative in herd expansion, particularly in heifer retention.
“It’s a long time till you get a return on them,” he said. “If you’re borrowing operating capital, keep in mind that interest rates are still going up, and higher interest rates tend to drive landowners to expect higher rent. Another problem is that input costs go up, but they don’t come down fast or easy. Knowing your actual costs is very, very important.”
HIGHER INTEREST RATES
As producers navigate decisions such as selling or retaining calves, herd expansion and heifer development, rising interest rates are a key factor to consider.
“Interest rates will play a bigger role in profit margins this year and next,” Gessner said. “Those carrying little debt and not requiring an operating note will have higher margins than those requiring financial assistance. Interest rates have doubled since a year ago. If you are buying calves or looking into rebuilding the herd, the higher costs of those animals and the higher interest rates will affect profit margins.”
Gessner cautioned producers against overreaching their financial situation during this season of high cattle prices.
“High herd rebuilding costs, expensive equipment replacement costs, interest rate effects and high feed costs could lead to financial problems when prices fall,” she said. “We need to be just as aware of our financial situation and direction during the good times as we are during the down times.”
Lesh said that increased costs of inputs exceeded the market well in advance of these calf prices.
“We’re just playing catch up now,” he said. “We needed these prices two or three years ago to break even, especially through the drought of 2020, 2021 and 2022. A lot of things have doubled in price. Parts are out of sight. Diesel may be $1 per gallon lower than it was a year ago, but it’s $2 more than it was three years ago.”
Additionally, Lesh said, the cost of capital has doubled in the past year.
“The fed raised interest rates by another one-quarter point this afternoon,” he said. “People are paying 9-10 percent interest on most operating loans. Historically, that is still mid range; I remember interest rates being twice that.”
Lesh typically buys feeder cattle as well as raises his own heifers.
“Interest rate is a sleeping giant,” he said. “If you buy feeder calves for $600 per head more this fall than you did last year at a 9 percent operating loan, that’s $54 more in interest on that animal in a year. When you factor your cost of gain on cattle bought today to be run over as yearlings, they’ll have to bring $22-23 next year just to break even. It’s looking like I’ll have twice as much risk to make the same amount of profit.”
Lesh said that cattle producers need a couple of strong market years to get even, and that there are a lot of moving parts behind the price rally.
“Much of it is supply driven,” he said. “In the cow-calf business that’s when you get big spikes. Profit margins go to different segments of the industry; right now the producer of feeder animals is in the driver’s seat for a while. There’s a lot of money to be made this fall on cattle bought a year ago and calves born this spring.”
Greg Arendt, manager of Valentine Livestock, Valentine, Neb., said that a strong hay crop would be one key to seeing continued profits in the cattle industry.
“Maybe even more than good prices, we need a significant feed crop; we don’t need bugs, or an unduly bad winter, we need enough feed to keep cattle in good condition through winter without having to spend excess money to maintain a herd of cows,” he said. “If you can access feed, either your own or at a reasonable price, within 50 miles so you don’t have a huge trucking bill, you have a good chance of surviving the winter from a cost standpoint. Two hundred dollar per ton hay does not cut it.”
Arendt pointed out an underlying factor that has likely accelerated the market spike.
“How does it get there so fast?” he asked. “Supply and demand are supposed to work in a methodical way. We’ve gone from point A to point B almost in a vertical line. It is noteworthy that from December to February in many heavy feeding areas, the winter was so hard those cattle never gained a pound. At $3.50-$4 per day to feed them, they went from making money to losing money. Because numbers were short, packers were paying up, so the feeders sold them at 1,400 pounds instead of 1,500 pounds. Carcass weights were lower, and it is pretty significant when you take 50 pounds off these carcasses. All of a sudden the packer doesn’t have all the pounds to sell. When our nationwide kill count is around 120,000 head per day, times 50 pounds, that’s 6 million pounds of beef per day. That is more significant than the head count being 3 percent less than last year.”
Arendt said that a similar scenario is playing out with cull cows. With high feed costs playing into higher cost of gain, cows are not put on feed as long and are killed at 1,500 pounds instead of 1,700 pounds.
“People know me for running a livestock auction barn,” he said. “They think you are supposed to know something. We want to know more, we study the market and try to get a feel for what’s going on. There’s definitely excitement for cow-calf operators in anticipation of prices several hundred dollars more than the past several years of unfortunate prices. It’s taken us almost 10 years to get there.”
In his 30 years at Valentine Livestock, Arendt said that cyclical prices are normal.
“Six or seven years out of 10, calf prices are almost below the cost of production,” he said. “Producers are supposed to survive on the other three years. When you run cows, if there’s not weevils, there’s grasshoppers, or no hay. Five or six years out of 10 there’s some kind of turbulence, whether it’s bugs, drought, floods or blizzards. I don’t know how you actually have a cattle ranch that you can run economically when it seems like you are on a continuum of peril.”
STAYING POWER?
Is the market going to continue at the level of current prices for a while? Arendt thinks it is more than likely.
I have already been to ranches where they are going to sell their steers this fall and keep their heifers,” he said. “They expect to have enough cash flow off their steers that they can keep their heifers. That will change the amount of feeder cattle going into feed yards; when heifer retention gets high, then the number of heifers in feed lots goes down, and that will likely drive prices to stay high for a few years. In the meantime, it would be great if we get a feed crop for upper Midwest good enough to stock our pastures, and have normal grass, normal hay crops. Those are the numbers that keep you on the land. You can survive if you have feed.”
Still, with fall promising record calf prices, producers are hoping to thrive, not merely survive.
“These prices are high compared to what we’re used to, but there is nothing high about these cattle at all,” Dennis Hanson said. “A hundred dollars more per hundred weight feels huge when you’re selling calves. Even $50 more per hundred weight is $0.50 per pound, but the meat in the grocery store has gone up a lot more than that.”
Hanson said that in 1970, he bought a new ford pickup for $3,100. At average prices at the time it took 10 calves to pay for it. Now it takes more like a truckload of calves to pay for a new pickup.
“There is plenty of money in the cattle industry for everybody,” he said. “We are finally close to having our market back since 2014-15 when the packers took away COOL. At the peak of the pandemic, packers were making more money off fat cattle than they were giving for them. Today, they’re giving $1.80-$1.85 for live cattle, and the live equivalent leaving the plant is bringing $2.22. Not including niche deals they are still making over $600 per head profit. The other side is finally getting something.”
Reuters reported in May that packer margins had fallen to $40 per head in April of this year.
“From the rancher’s perspective cattle prices look good both this year and the next,” Dierson said. “The question remains: is there enough hay and grass to enable herd expansion? If all you see are steers coming to market this fall, that’s a sign that producers are holding heifers back. If we have large numbers of heifers coming through, it will likely be another year before anything changes nationally, and prices could stay strong.”
Hanson reiterated the sentiment of ranchers across the nation.
“It’s about damn time.”
