Cow-calf producers might look at 2009 in the same light as their sophomore year in high school — something to be endured while they look forward to the rewards that come with being a senior.
Since it's likely that your sophomore experience is but a dim memory, focus instead on your senior year. Chances are, the memories still shine bright. So it may be in the cattle business, too.
“We've had a dramatic drop in the beef cowherd,” says Emmit Rawls, University of Tennessee-Knoxville agricultural economics professor. And while he thinks the cowherd may increase at some point in time, “I don't think it will be a sharp increase. That should keep prices pretty strong once we pull out of the current economic situation we're in.”
When that will happen, however, is anybody's guess, says Dillon Feuz, a Utah State University Extension marketing specialist and professor of applied economics. Both economists agree the industry's near-term future is closely tied to that of the general economy. When the overall economy shows signs of a turnaround, consumer beef demand will improve.
“I'm certainly not a macroeconomist and it appears that those who claim to be aren't very bold in their predictions,” Feuz says. “But it appears that the volatility is going out of the stock market. And that appears to be beneficial to the commodities.”
In the meantime, cow-calf producers and feeders alike can look at the second half of the year as a planning period for what may be better prices in 2010 and beyond.
Macroeconomics aside, cattlemen still have some things to concern themselves with — drought, floods, input costs and mandatory country of origin labeling are among the lineup of usual suspects. The net effect of those and other factors has been that the cattle industry, along with pork and poultry producers, are all cutting back on production, a supply-dropping trifecta that Rawls says hasn't happened on a per-capita basis since 2001.
“I expect the calf crop to be lower this year and very likely next year. So while you may be hurting right now, I think this bodes well for the longer pull.”
In fact, using some data generated by John Lawrence at Iowa State University, Rawls says now may be time to start thinking about retaining heifers this fall.
The data show that making a constant investment in replacement heifers in a 100-head cowherd increased average annual profit by 40% and net worth by $100,000 over 25 years.
“So that basically means when heifers are cheap, you put more heifers in the herd. When heifers are expensive, let somebody else own them. My bottom line is it's probably a good time to be adding heifers. With the herd being reduced, by the time you get that heifer in production, the cow-calf business ought to be pretty good again,” Rawls says.
And, if predictions come true, it appears both cow-calf producers and cattle feeders will be able to at least operate at breakeven for the rest of the year.
“It appears as long as the economy stays somewhat in the doldrums, corn is not going to take off,” Feuz says. He and Rawls both think corn will trade around $4/bu. this year, higher than cattle feeders have historically enjoyed. “But we're taking out the uncertainty of thinking it might be $6 or $8 because of ethanol's impact. I think if it will stay there ($4), then we'll know where the feeding margins will be and we can deal with it.”
His models indicate that cattle feeders, after two years of a bloodbath, may have made a little money in the second quarter.
“Going forward, (fed-cattle returns) will probably be closer to breakeven for the rest of the year. So come fall, that will help; if they haven't been losing another $100-200/head, I think they'll be a little freer with the bid,” Feuz says.
That prompts him to prognosticate feeder-cattle prices at steady to $5 higher than last fall. “And I think there's more upside if the economy at least stabilizes and people are a little more willing to start buying (beef).” If that forecast holds, cow-calf producers should be able to operate at close to breakeven, he says.
In response to the economic heartburn felt by many Americans, consumers have shifted away from higher-priced restaurant meals in favor of lower-priced restaurants and grocery stores. In response, the Choice-Select spread has narrowed and even briefly inverted. However, Rawls sees that as a temporary aberration.
“I don't think people's taste and preferences have changed that much,” he says. “Maybe people can't trade cars like they'd like to, but they can enjoy eating better at home. They've made some shift in what they're buying due to economics, but I think they would still enjoy, and continue to enjoy, the higher-grading product when they feel their pocketbook can stand it.”
And Feuz says that it's not that consumers are going to the retail case looking for lower-priced product as that they're switching their dollars from restaurant steaks to fast-food hamburgers. “If you've got a branded program that's built up loyalty, it appears that people are staying fairly loyal to those brands” as consumers do their grocery shopping, Feuz says.
So aiming for the Choice market is still a viable, if not a moving, target. “If you're trying to capture a premium for the upper two-thirds Choice and there's no label program associated with it, then you may be a little disappointed in the outcome,” Feuz says. “But if you've got a successful branded program that you're involved with, you may still find some opportunities there.”
Opportunities may also exist for cow-calf producers who retain ownership, Rawls says. “People who have cows that are something special in terms of genetics, health program, age and source verification, that's the way to capture that full value. You obviously need to use some sort of price risk management, both on the feed and the cattle, to get that accomplished. But I think the money is out there.”
Age- and source-verified cattle are a good example. Typically, cow-calf producers can't capture the full age and source premium unless they retain ownership, Rawls says, because the age and source premium is usually bundled with other attributes, such as preconditioning, genetics and maybe past feeding history. “The way to get that age and source premium is to own the cattle all the way to the packing plant,” he says.
Don't break out the cap and gown just yet — there's still plenty of economic healing that needs to be done before cattlemen can graduate to better profitability. But the economy will heal and the cattle market will begin to once again react to the fundamentals of supply and demand. Those who are prepared will reap the reward.