“It’s one thing to be cautious, but it’s another thing to be so cynical that you miss taking advantage of an opportunity,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist. “This is a different business now. I think we’ve turned the corner.”
In fact, as Peel visits with producers and speaks at meetings these days, he’s telling producers to count on $1,000 calves and $1,000 cull cows for the next five years.
“If you’re going to be in this business, now is the time for producers to take the reins,” Peel says. “The only producers who will be hurt by this upward shift in the market are those who wait three years and then decide to start expanding.”
That market shift encompasses a lot of diverse specifics, some already many years evolved. There’s everything from branded beef marketing as the rule rather than the exception at retail, to value-added marketing programs, to development of convenient beef value cuts, to increased global wealth and demand raising the floor below most commodities. These forces have twisted and bent all sorts of traditional market rules of thumb in recent years. And while equity requirements and price volatility have increased along the way, so has opportunity.
“We’re so used to being on the defensive that I sometimes think we don’t know how to handle it when things are good in this business,” Peel says. “We’ve been in this mentality that economic recovery has been frustratingly slow. It has been, but the economy has also made tremendous progress.”
Even the most optimistic were surely stunned by cash fed cattle prices reaching $150/cwt. in January (Northern Plains) and boxed-beef cutout values hitting $240/cwt.
Short-term market dynamics exaggerated the rally, but long-term supply and demand fundamentals made it possible. Moreover, increased wholesale beef values and fed prices meant cattle feeders had a chance to profit, even with breakevens driven higher by the cost of replacement cattle.
“When prices go up overall, the margins are more sustainable for everyone. That’s what happened the first part of January,” Peel says. “The squeeze on margins isn’t as dramatic when prices move to a higher plane.”
In simple terms, exploiting the current opportunity will depend in part on maintaining the industry’s infrastructure, which has been weakened in recent years by too few cattle numbers.
“There is a need for significant herd rebuilding,” Peel emphasizes. “And the markets will keep sweetening the pot until that happens.” He adds that herd rebuilding comes down to producer expectations. “If producers don’t think the market will be good enough for long enough, they won’t rebuild,” no matter what Mother Nature allows.
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Peel divides the needed herd expansion into two parts.
• First is recovery of the nearly 2 million head of cows that left the business from 2011 until now. That will take until at least 2017, Peel says.
According to USDA’s annual Cattle Inventory report released in late January, there are 29 million beef cows. That’s 1% less than last year and 300,000 head less than 2012. Heifers retained for replacements were up 2%, at 5.5 million head, though.
• Second, Peel says the industry needs to recoup the 1.4 million head of cows that left the business between 2004 and 2011, the last time the industry tried to expand. That will take until at least 2020.
As Peel travels the country, he senses that producers are getting more comfortable with the idea that prices at a higher plane are more than an anomaly.
“I think producer sentiment is beginning to change,” Peel says. “More of them are beginning to see profit opportunities similar to the early 1970s when many of them got started. I think more young people are starting to see the long-term potential, too. There’s a lot of potential here. I’m very optimistic about the beef business,” he says.
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