“The last few years, time has usually saved you if you're a margin operator (feeder or stocker), now it will be against you,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.
That's today's picture of cattle industry economics compared to last year. The market is running away from margin operators because supplies are increasing significantly relative to demand.
It's not all rosy for fixed-cost operators — cow-calf producers. However, short cow numbers mean the sector should remain profitable this year, albeit less profitable than the past few.
“The biggest difference over this time last year is we have 10% more cattle on feed heading into summer — record large for this time of year,” notes Mike Miller, Cattle-Fax director of research and education.
Not only is a wall of increased supply set to hit the market in the historically softest market months of the year, it's coming when high breakevens already have feeders losing $100/head (more on yearlings, less on calf-feds), Miller says.
Peel believes, however, the record on-feed numbers of April 1 make reality appear darker than it is. Though numbers are up, he says it's not due to a cattle inventory 9-10% larger than predicted. It's because more calves were forced into feedlots earlier by drought and lack of stocker pasture.
“We started the year with a cattle inventory 1.7% larger than 2005. We'll add another 1-1.5% with feeder calves from Canada. So, we have the capability for feeder-cattle supplies to be 4-4.5% larger this year, but not 9%,” Peel says.
Either way, Miller says, “We're in really good shape from a demand perspective, but probably not good enough to offset the supplies we see coming at us.”
In fact, retail beef demand is down 4.5% the first quarter, according to preliminary Beef Demand Index figures. Consumption is up slightly, but a sharp decline in inflation- adjusted prices means demand is down, though still well ahead of 1998 when it finally turned the corner.
But analysts like Western Kentucky University's Nevil Speer wouldn't be surprised to see beef demand suffer more under the collective weight of record and near-record supplies of poultry and pork. That along with high fuel prices that increase the price of all consumer products, while lightening consumer wallets.
For all who think the outlook would be twice as bright if politics and ineptitude hadn't conspired to keep international beef trade in limbo, Peel and Miller say having the international markets fully engaged would undoubtedly provide a psychological lift. It likely wouldn't change the industry's current position from a fundamental standpoint, however.
Drought and corn are wild cards
There are indications drought could slow expansion, too. According to the Livestock Marketing Information Center (LMIC), federally inspected cow slaughter grew 2% the first quarter this year compared to 2005, though still 11% below the five-year average. In beef cows specifically, LMIC says first-quarter harvest was up 8%.
Of course, a quarter doesn't make a trend. Overall, Peel believes drought is forcing more cows to new addresses rather than harvest. In other words, look for continued expansion but perhaps more modest than predicted.
“Yes, we'll expand, but I believe it's very guarded. Producers have become increasingly risk-averse,” says Speer, who believes the most recent cattle cycles point to more inventory moderation.
He says the beef-cow inventory in 1986 was 33.75 million, hitting a cycle peak of 35.32 million in 1996. In 1966, inventory was 33.5 million head, swelling to 45.7 million head in 1975, before falling to 35.41 million head by 1985.
“More important than the reversal of declining cow numbers is the scope of impending expansion,” he says.
“What scares me more than cyclical change is the potential for a spike in corn price,” Miller says. “One of these days, we'll get caught.”
He says growing alternative uses of corn, such as for ethanol, means a steady corn price basically translates to record corn crops every year.
More than anything, corn prices could take the wind out of calf prices in a hurry. Cattle-Fax figures a 50¢ increase/bu. of corn (relative to the same fed-cattle price) lowers the price of a 550-lb. steer by $7.50/cwt.
“We generally say a 10¢ change in the price of 1 bu. of corn changes the calf price in the fall by $1 in the opposite direction,” says Tim Petry, North Dakota State University Extension economist.
Then there are always the intangibles.
“Any time one sector is getting crunched on, like feedlots are today, it's not good for industrial stability overall,” Speer says. Besides which, he points out, the economic environment in which feeders are taking a pounding today is different than the last time such red ink bled out of the industry, about five years ago. High prices mean more equity is required and placed at risk.
Playing this cycle phase
“This is the point in the cycle when extended ownership of inventory tends not to pay very well. We've told our members (cow-calf) this may be the time to sell earlier than normal if they can find the right program, such as forward contracts or early video sales,” Miller says. “You want to prevent the market really getting away from you, and there's usually a year or two through this stage of the cycle when that can happen,” Miller says.
Tim Petry agrees risk management takes on added importance through this cyclical transition. However, for cow-calf producers, he believes part of that is taking stock of how and what they market.
“Cow-calf producers will need to market differently than in the past,” Petry says. “I think we'll see more premiums or discounts for feeder calves that meet the needs of the market.” He's speaking of health premiums for calves receiving appropriate and documented health management, documented age, source and process verification — those kinds of things.
“I think it will be more important in the future. Buyers can always be pickier when numbers expand,” Petry says.
One thing remains constant, though. Peel says, “The best cure for high prices is high prices, and the best cure for low prices is low prices.”