How to rebuild cattle inventories, profits

- Cattle report expected to show 3% decline in inventories. - Placements expected to fall from 2012 levels. - Beef demand may actually

EARLY last week, reports surfaced that the significant liquidation of the U.S. cattle herd seen over the past few years will lead to a major reduction in staffing at the National Cattlemen's Beef Assn.

The reality that a smaller cow herd has led to a significant, sustained drop in beef checkoff collections poses a series of questions about the long-term prospects for rebuilding cattle inventories and what factors might allow that to happen.

The U.S. Department of Agriculture released its July "Cattle on Feed" report last Friday, and while the report was not yet available at press time, a breakdown of the data is available at, with more in-depth analysis to follow in this column in the July 29 edition.

Traders were expecting USDA to report cattle on feed as of July 1 at 97% of last year's level, with placements and markets each just shy of 95% of comparable year-ago numbers (Table).

June inventories were down 3.1% from 2012, and traders expected that trend to continue. The July "Cattle on Feed" report has more significance than normal because USDA discontinued its July 1 cattle inventory survey due to the sequestration. This will make it more challenging to make a midyear reconciliation to the cattle supply balance sheet because another inventory report will not occur until January.

Any way you slice it, feedlot inventories are running well behind last year's pace, but June caught up with the 2007-11 average for the month (Figure 1). Analysts largely expect the July figure to also be on par with the five-year average.

One factor driving the expectation for smaller placements than last year is a rebound in U.S. pasture conditions. Last year's historic drought really put the hurt on pastures across much of the country, and following on the heels of a multiyear drought in Texas and the Southwest as a whole, many producers cried "uncle" and sent calves to town that they might have otherwise kept on grass.

That might wind up being a winning formula for everyone involved, with cattle producers getting a chance to keep a lid on their costs of gain and feedlots not having to place as many lighter calves.

While placements are one item to watch, marketings are another key indicator, and the June figure could well be the smallest for any month since USDA began the data series in 1996 due, in part, to having one fewer marketing day this year than last and having fewer cattle available in general.

One question that lingers is whether better pasture conditions and the prospect of less-onerous feed costs will lead ranchers to retain more heifers in hopes of growing their herds. That process may or may not be beginning, but the concept of "demand destruction" discussed frequently last year still has relevance in the post-drought recovery.

A June report from Rabobank's Food & Agribusiness Research & Advisory Group suggests that "structural shrinkage" in the North American beef industry is actually likely to continue and perhaps accelerate in the near term.

"It is a rare occurrence that all sectors within the cattle industry are profitable at the same time," lead author Don Close explained. "However, before the U.S. cattle industry can begin to fully rebuild after several years of contraction, it is necessary for equity recovery to take place in the cattle feeding sector."

With the Livestock Marketing Information Center reporting 26 straight months of average per-head losses for feedlots, Close has a point. His report concludes that high feed prices and lingering weather challenges have placed such a burden on the industry that even the small bumps seen in recent weeks have likely kept producers from finally turning the corner.

"A number of complex challenges, including growing price spreads between beef and alternative proteins, excess capacity along the supply chain and dwindling profitability along the chain, are contributing to the shrinkage," he said. "We expect domestic beef supplies to continue to contract and the supply chain to continue restructuring, making a rebound in the beef industry unlikely in the near term."

So, the cycle looks something like this: Drought wrecked pastures and exacerbated already high feed costs, which led producers to liquidate cattle numbers, which limited supplies and pushed beef prices higher, which might be leading consumers to purchase other competing protein options, which could, in turn, lead to smaller consumer demand for beef and, in turn, lower beef prices.

July "Cattle on Feed" pre-report estimates


Avg. of


Range of


estimates, %

cattle number

estimates, %

On feed July 1




Placed on feed in June




Marketed in June




Note: All percentages are comparisons to year-ago levels.

Source: Daily Livestock Report, using Dow Jones survey results.

How to rebuild cattle inventories, profits


Beef demand

During the first three years of the decade, beef demand started to rebound from a multiyear slide. Data compiled by Kansas State University economist Glynn Tonsor showed a slight recovery in the Choice beef demand index from 2010 to 2012 (Figure 2), so the question becomes whether that trend can sustain itself in the face of near-record-high retail beef prices.

"While it is tempting to focus on market share, per capita consumption or other product volume flows to monitor demand, this can be very misleading," Tonsor explained. "Demand can only be accurately measured by assessing the combination of price and quantity. Demand is a key component of economic signals sent throughout the entire supply chain."

Tonsor co-authored a checkoff-funded study on the determinants of beef demand (Feedstuffs, July 15) and found that declining per capita supplies of beef necessarily means declining per capita consumption of beef. Ergo, the report concludes, declining per capita consumption can actually occur while beef demand is increasing.

In fact, that's what Tonsor's data showed. Per capita beef consumption fell in 2011 and 2012 relative to prior-year volumes, but demand — as a function of the quantity demanded at a given price — actually increased.

USDA projections, meanwhile, suggest that per capita consumption will continue to slide — due to a shrinking cattle herd — through 2015, at which time a growth in cattle numbers will lead to increased consumption.

So, what, exactly, drives demand, given that per capita consumption is merely the per capita availability of beef?

According to Tonsor's report, key factors producers and the industry can influence include: beef price, food safety, product quality, health, nutrition, social aspects and sustainability.

The report notes that price, food safety and product quality are at the top of the heap when it comes to determining demand. Consumers surveyed as part of the study ranked safety, freshness, taste and health as the "most important" factors in their purchasing decisions, with convenience, origin/traceability and environmental impacts most frequently described as the "least important" factors.


Meat exports

Beef export volume grew 3% in May, with value gaining 9%, according to the latest information compiled by the U.S. Meat Export Federation (USMEF). Pork exports, meanwhile, fell 3% in volume and 3.6% in value.

Russia's unwillingness to accept U.S. red meat continues to keep a lid on U.S. exports; excluding Russia, beef export volume for May increased 12%, and export volume for the first five months of the year grew 3.5% (instead of falling 3%).

"The loss of a key market like Russia ripples through the red meat industry," USMEF president and chief executive officer Philip Seng said. "The absence of one of the largest meat purchasers in the world affects the volume of product sold and, more importantly, the price that other customers need to pay for it in a competitive marketplace."

Beef exports in May accounted for 10% of muscle cut production and 12.7% of beef and variety meat production, fairly consistent with 2012 levels. The value of exports in May equated to $231.67 per head of fed cattle slaughter, up from $207.09 last year.

Improved market access to Japan has played a key role, with beef exports jumping 75% in May, almost 8% below May 2003 volumes. Exports to Russia, by comparison, are off 99% from last year.

USMEF is a key player in marketing U.S. beef and pork, and its efforts are affected by the availability of beef checkoff assessments to fund key marketing and promotion projects.

USMEF told Feedstuffs that while all checkoff funding sources fluctuate, the beef checkoff "is uniquely challenged in that it is assessed on a per-head basis. So, even as more beef is produced from each animal, checkoff revenues do not necessarily keep pace."

Beef checkoff funding accounted for 19-22% of USMEF revenues from 2009 to 2012, and total funding from all checkoff-based sources (beef, pork, corn and soybeans) accounts for 50-55% of the group's annual budget. USDA funding accounts for 40-45%, with the balance coming from other sources such as membership dues.

One of the advantages USMEF identified in marketing red meat abroad is that foreign marketing campaigns often include significant third-party contributions. Investments from distributors, retailers, restaurant chains and other partners help checkoff and USDA dollars go further by maximizing the reach and exposure of the group's marketing efforts.

Volume:85 Issue:29

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.