Expanding Your Ranch In Today’s Cattle Market

Just the whiff of higher calf and feeder-cattle prices used to be enough to unleash industry optimism, sending cow-calf producers scurrying to retain or buy more heifers to expand and exploit the cattle cycle

Just the whiff of higher calf and feeder-cattle prices used to be enough to unleash industry optimism, sending cow-calf producers scurrying to retain or buy more heifers to expand and exploit the cattle cycle.

For all practical purposes, though, the nation’s beef cowherd has liquidated for the past decade.

“Historically, we’ve had to see year-over-year increases in heifer retention of 5-6% in order to see expansion in the herd,” explains Darrell Mark, a University of Nebraska agricultural economist. “We haven’t seen that kind of increase in heifer retention in a long time. In fact, it barely happened in the 1990s during the previous cattle cycle.”

Even after the heady jump in calf and feeder prices since Jan. 1, and the likely prospect of steamy profits the next few years, the industry continues to place more heifers on feed and to slaughter more cows than average.

BEEF readers may be an exception. In an exclusive BEEF magazine poll conducted in May, 39% said they added numbers to their herds in 2009; 60% didn’t (see the results in the June issue of BEEF at beefmagazine.com). For 2010-2011, 41.6% of respondents said they planned to maintain the same herd size; 30.6% said they intended to expand by 1-10%, and 12.1% intended to expand their herd size more than 10%. Conversely, 8.9% of respondents said they intended to reduce their herd size by 1-10% and 5.8% intended to reduce their herd size by more than 10%.

“Some people have to be expanding, but in aggregate, the industry is not,” says Kevin Dhuyvetter, Kansas State University agricultural economist.

Beef cow numbers have declined or remained static so long that some even question whether the cattle cycle still exists. It does, though just flatter and arguably less important than in the past. These days, Dhuyvetter says, it makes more sense to consider the cycle in terms of annual beef production rather than cow numbers.

When you do, you understand that the chief reason there’s been so little excitement for expansion is that there has been no need.

“Of the last 40 years 2008 had the second-smallest beef cowherd but we produced the third-highest level of beef production that year,” Dhuyvetter explains (Figure 1).

According to Mark, domestic beef demand declined 15% since 2004.

“Per-capita beef consumption in the U.S. is likely to be less than 60 lbs. in 2010, which would be the lowest in several decades. The same is expected in 2011,” he explains. “The efficiency of the industry either requires more consumption of beef or a smaller production factory. Back in the early 1950s, we produced about 475 lbs. of beef/beef cow in the herd. Today, we produce more than 800 lbs./beef cow. That’s a trend-line increase of about 5.6 lbs./year.”

Profit margin narrows

Rising costs are the other obvious damper to expansion.

“Returns to cow-calf production have been rather modest for the past five years, and projections for the next couple years leave producers doubtful that they will significantly improve.” Mark says. He explains current industry estimates peg average cow-calf returns over cash costs at about $50/head for this year, similar to returns in 2006 and 2007. Average losses in 2008 and 2009 were approximately $17/head and $34/ head, respectively.

“So, for the last five years, a typical producer might have cumulatively made $140-$150/head. That’s not a huge incentive to increase the herd size, especially given the high capital costs associated with cow-calf production that keep return on investment to historical levels around 3% to 4%,” Mark says.

“Expenses have played a large part in these modest profits,” he continues. “Feed prices have increased, led by higher corn prices. Competition for crop acres hasn’t only increased cropland, but pasture and range prices have increased, as well. And, the possibility of higher corn prices for the next couple of years makes producers cautious about increasing herd size at a time when high corn prices could lower feeder cattle prices.”

Increased costs have added $100 to raising a calf, Dhuyvetter says. According to data from the Kansas Farm Management Association program, total cow-calf costs increased from right at $600/head in 2006 to about $750 in 2009 (Figure 1). In terms of dollars per hundredweight sold, total production cost jumped from almost $130/cwt. in 2007 to almost $140/cwt. in 2009.

Dhuyvetter and Mark point out that, when there has been profit, producers tended to pay down debt rather than take on new expenditures.

Is there optimism for tomorrow?

“Years ago, when the industry had more of a commodity focus, everyone did about the same thing, expanding and contracting together because everyone was selling the same generic product,” Mark says. “Today, we see more branded products and beef-production systems aligned to meet specific consumer demands. Those that most effectively do this will be more profitable and have more incentive to expand.”

Add that to tighter economic conditions and the fragility of the overall economy, and Mark believes expansion will be more conservative this time around.

Macro-trends beyond producer control are increasing risk more than ever, too.

As an example, Dhuyvetter points to the unintended consequences of the nation deciding to grow the ethanol industry through subsidies. He explains, “When we fundamentally shift to a higher cost structure for beef production, we lose some of our competitiveness, especially if the U.S. decides not to do what’s necessary to play in the world market, such as developing a traceability system.”

Dhuyvetter cautions against unfounded pessimism, though.

“If you look at the good years vs. the bad years (Figure 1), there’s a $180-$200 variation between the top third and bottom third years,” Dhuyvetter says. “But the average variation between the third-most profitable producers and the third-least profitable is $357 at a point in time (Table 1). So, there are producers losing money, even during the good years, and there are producers making money, even in the bad years.”

None of that accounts for emerging new technologies that could help producers carve out even more economic advantage.

“Think about what could happen in this industry if sexed semen becomes commercially practical. We wouldn’t have to feed nearly as many heifers; we’d add another 100 lbs. to carcass weights,” Dhuyvetter says. “There are technologies out there that would enable significant industry expansion without adding a significant number of cows.”

Likewise, none of the above takes into account the potential for increased beef demand.

“We know that if global demand increases as predicted, and if the U.S. is willing to play in that market, this is a great time to think about expansion,” Dhuyvetter says.

Next month: “Proceed With Caution”