Profitability returning to cattle sector

Profitability returning to cattle sector

Profitability returning to cattle sector
SOUNDING like a broken record, perhaps, the beef industry is again poised to return to profitability — soon.

"We keep waiting for the big pop in cow/calf returns, and for the third year in a row, we're expecting that it will come this year," said Jim Robb, director of the Livestock Marketing Information Center (LMIC). "We've seen a real worst-case scenario in recent years, though, because of the persistent and widespread drought."

Robb explained that cow/calf returns were in the red for 2008 and 2009 and have recovered somewhat in recent years, though not to a level that would encourage any expansion in the beef herd (Figure 1). Not surprisingly, the cow herd is at its smallest size in many years, and producers appear to be weighing expansion plans with a heavy dose of caution.

LMIC estimates annual returns per beef cow based on cash costs plus rent, and Robb pointed out that last year's return of $33.70 per head certainly wasn't much of an economic signal to retain more heifers.

"If you multiply that by 500 cows, that's not giving you much to live on," he explained. "Drought caused people to liquidate herds, so they're making less money all the way around."

However, with an improving calf market and rapidly falling corn prices, LMIC projects 2013 cow/calf returns at $117.80 per head.

Robb cautioned, however, not to expect ranchers to be flush with cash quite yet. Producers aren't likely to reap the benefits of improved calf prices until this fall, when they market this year's calf crop. Given that scenario, he described the mood in the countryside as "a little tense" for the time being.

"This year is going to be a rebound, but we're still going to be below where we were in the really good years of the early 2000s," Robb said.

Next year, on the other hand, could be an entirely different story. With the U.S. Department of Agriculture projecting a bin-busting corn crop and consumers still showing a willingness to buy beef at record retail prices, the outlook in cow country could be something special.

"For 2014, the number looks obnoxiously high," Robb said. "Feed costs should continue to come down, and it looks like we'll be approaching returns of roughly $270 per cow, assuming we don't have another drought." That would be a new record.

Robb said the likelihood of sub-$5/bu. corn prices and the prospect of slow but steady economic growth underpin LMIC's forecast.

"The U.S. economy is growing, in terms of GDP (gross domestic product), at 2-3% per year, so consumers will have more money to buy beef," he explained. "We've been talking about this for a few years now, but drought really took away the economics of growth in the cattle business."

The trend of a shrinking cattle herd, meanwhile, means cattle prices are not likely to come down much either. Based on cow and heifer slaughter reported so far this year, Robb said it is a near certainty that USDA will report a smaller cow herd again in January.

All of that adds up to better returns soon. If the third quarter of 2013 isn't enough to get cattle producers excited, the fourth quarter will be even better, and 2014 could be much, much better.

That is, of course, if Mother Nature plays her part and the U.S. economy doesn't fall apart at the seams.

 

Cattle feeding returns

Profitability returning to cattle sector
While cow/calf returns could set a record next year, it's going to be a tougher road to recovery for the cattle feeding sector.

Although LMIC expects feeding to return to profitability during the fourth quarter of 2014, the industry is doing its best to survive 30 consecutive months of red ink.

On an annualized basis, feeding returns per head bottomed out at a $166.90 loss in 2012 and have recovered slightly. LMIC is projecting an annualized loss of $103 per head this year (Figure 2).

"The cattle feeding sector has had it as bad over the past two years as we've ever had it," Robb said. "The pressures in terms of costs of production, excess capacity and high feeder cattle prices have come together such that cattle feeding has been a red-ink proposition for the past three years."

With feeders reporting some of the largest monthly losses LMIC has ever recorded, it's little wonder that producers are stressed, even in a business that Robb said has "always been tricky." Feedlots are still adjusting to the "new realities" of feeding higher-priced feed grains and extreme volatility on both sides of the ledger, and several have gotten out of the game entirely.

Looking ahead to 2014, if the economy continues to grow and feed prices do moderate, feeders can expect a return to at least a breakeven environment. Astute managers, in fact, might actually make money next year.

Another fundamental factor is the overall tightness of the cattle supply, which Robb described as a situation that affects the entire North American cattle complex. Year-over-year imports of Mexican feeder cattle are running as much as 50% below recent years, and the Canadian beef herd is still 25% smaller than it was in 2005.

"Margin players — packers and feeders — are still going to be pressured by very, very tight cattle supplies," Robb concluded.

 

Price forecasts

Looking at pricing prospects for the near future, fed cattle prices could be moving toward relatively strong levels, and feeder cattle prices should improve as well.

For 2012, fed cattle prices averaged $122.86/cwt., a 7.1% improvement over the prior year. LMIC now projects 2013 prices to hit a record-high $125-126/cwt., a 2% improvement from last year's record prices (Table). For 2014, fed cattle prices could very well average more than $130/cwt., assuming that GDP grows at least 2% year over year.

"We're seeing a 5% bump in prices from a 5-6% decline in beef output," Robb explained. "I'm more comfortable that beef output will decline than I am that the economy will grow, actually."

Given that beef prices are already at record retail levels and that exports are likely to decline on a tonnage basis, Robb said few surprises are expected there. Should the economy falter, on the other hand, consumers might think twice about paying high prices for beef and instead choose pork or chicken.

"The competing meat story gets more important in 2014, so building demand for beef becomes even more important," he explained. "The demand side is a real concern, especially given LMIC's forecasts for pork and chicken prices to moderate in the coming year. Beef is likely to move higher in the face of that, so it's going to take some really good advertising and a really good economy."

 

Beef production and cattle prices

 

-Beef production (billion lb.)-

2010

2011

2012

2013

2014

LMIC

26.305

26.195

25.913

25.116

23.667

USDA

26.305

26.195

25.913

25.337

24.105

 

-Cattle prices ($/cwt.)-

Source

500-600 lb. calves

700-800 lb. yearlings

Fed steers

2010

LMIC

122.84

110.89

100.28

USDA

109.31

100.28

2011

LMIC

148.37

135.04

114.74

USDA

133.74

114.74

2012

LMIC

168.26

148.81

122.86

USDA

146.39

122.86

2013

LMIC

164-166

141-143

125-126

USDA

140-143

124-127

2014

LMIC

177-182

153-158

130-134

USDA

160-170

126-137

Sources: Livestock Marketing Information Center and U.S. Department of Agriculture.

               
                         

 

Volume:85 Issue:31

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