AS the U.S. beef cow inventory stands at historical lows and beef prices reach new highs, expansion is the "talk of the industry," at least for cow/calf operations.
In the June "CattleFax Trends" Cow-Calf Webinar, CattleFax analyst Larry Zimmerman explained that cattle producers are cross-examining the expansion notation.
In the past, when the beef cow inventory has decreased, producers responded by rebuilding the herd, which drove prices downward, as illustrated in Figure 1. Therefore, cow/calf producers are guarded about overexpansion.
However, Zimmerman said many aspects are unusual about this expansion cycle.
"The thing that is different about this potential expansion cycle is that there are many factors, in our opinion, that are going to dwarf the ability for a very aggressive expansion," Zimmerman said.
Looking at the beef cow inventory, the U.S. lost 1 million head of cattle from 2012 to 2014. Utilizing models and past data, Zimmerman said it will take at least five years to regain that million head, let alone grow the U.S. beef cow inventory.
Furthermore, cattle producers still are mentally and financially recouping from less-profitable years, especially producers that battled catastrophic weather events such as extreme drought.
As a result, this expansion cycle will occur if the weather supports good hay and pasture conditions, but the growth will be slower and more methodical than in the past.
With all-time high calf and beef prices, bred females and cow/calf pairs are not going to be cheap going forward.
Moreover, Zimmerman projected average cow/calf profits for 2014 at $275 per head (Figure 2).
Mike Murphy, risk management specialist for CattleFax, discussed several key factors that are presently affecting the feeder market.
Improved moisture will motivate cow/calf producers to retain more heifers to expand the herd. As heifers are retained, there will be fewer feeder animals available to enter the feedlots this fall, which will have a direct impact on the feeder market.
Currently, feeding margins are in the black. According to Murphy, margins are making roughly $100 per head at this time, which fuels aggressive bidding for feeder cattle.
Heading into fall, the feeder margins will drop off significantly and likely will head into negative territory, Murphy said.
In addition, the U.S. has excess feedlot capacity compared to the number of feeder cattle available.
"That will create an environment favoring those selling feeder cattle and calves as feedyards continue to try to maintain some sort of capacity from an operation perspective," Murphy explained.
Furthermore, if El Nino weather emerges and brings timely rainfall to winter grazing regions, specifically the Wheat Belt, in the third quarter of 2014, then competition for feeder cattle will stiffen as producers turn calves onto wheat stubble for grazing.
For the per capita net beef supply, Murphy projects another 2 lb. drop next year, continuing a downward trend. This decrease will be a bigger driver in terms of the price for fed cattle in anticipation that continued tight beef supplies will keep prices elevated.
Typically, the price for 550 lb. steers usually peaks in the spring, and the then market softens going into the summer. This year, the price did follow the seasonal upward trend, but it has reached $230-235/cwt. and is expected to remain close to that level for the second half of 2014.
That means there is likely to be some pull-back and disruption to the market.
"As a practical range, we can feel very confident that the market can trade in the $220-225/cwt. range," Murphy said. "To exceed those levels, then the demand has to be greater than suggested today."
Murphy projected that 750 lb. steers will trade at $190-202/cwt. in the short term but could climb to $207/cwt. in the third and fourth quarters of 2014.
Ryan Turner, risk management consultant for FCStone LLC, told the Dairy Outlook Conference that since 2010, the futures markets for feeder cattle have doubled, while live cattle futures have been just shy of doubling in value as a result of robust demand and a constrained supply.
Fed cattle margins are in the black this year, with profit margins exceeding $250 per head (Figure 3). However, feedlots are paying more for feeder calves in order to refill the yards.
Above-average beef carcass weights have lessened the impact of tight supplies on retail beef prices. Lower feed costs have helped beef producers add 10-15 lb. per carcass more than the three-year average, which is equivalent to an extra 11,000 head per week, Turner explained.
Still, a smaller cattle inventory does not necessarily mean a decline in beef production. Since 1970, the cow inventory has dropped 30%, but total beef production is only down 1%. Therefore, with advances in genetics and better operational practices and technologies, the U.S. is producing virtually the same amount of beef as 30 years ago.
Global demand for beef is healthy despite the high prices, with 12-14% of U.S. beef production exported. In 30 of the last 34 months, the U.S. has been a net exporter of beef; however, the tide turned in the last four months, and the U.S. is back to being a net importer.
For consumers, Turner projected that beef prices will be steady to higher for the rest of 2014.