Managing costs is key to riding out cattle cycle

April 25, 2016

4 Min Read
Managing costs is key to riding out cattle cycle

Focus on being as competitive as possible, which means lowering and managing costs; then you have the chance to profit no matter where the market is at any point in time.”

That’s the common recommendation shared by lenders I visited with earlier this year when quizzing them about how they were advising clients to manage price risk.

Part of the advice has to do with taking hold of the financial reins within producer control. Part of it has to do with the fact that cyclical expansion will continue to erode revenue — never mind the head-scratching market volatility.

“Crop prices are well off the peaks that were established in the 2012 drought year. On livestock, we had peak prices in 2014 that have also come down very sharply,” explains Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

“We’ve had some cost reductions, but not nearly enough to offset the decline in receipts. We are looking at several years of pretty tight financial situation for U.S. agriculture. Farm income is less than half of the 2013 peak, and we expect it to remain low for the next several years.”

How snug the financial situation gets for cattle producers depends in part on whether reality tracks closer to the 10-year projections from USDA, or those from FAPRI. Both offer a glimpse of production and price through the next decade based on different models and assumptions. They vary widely in both degree and timing.

USDA estimates the nation’s beef cowherd will grow steadily to 33.2 million cows in 2025.

“Lower feed prices than in the past several years raise producer returns and, coupled with improved pasture, provide incentives for herd expansion in the cattle sector and increases in beef production over the projection period,” according to USDA Agricultural Predictions to 2025, published in February.

FAPRI’s U.S. Baseline Briefing Book, released in March, sees beef cows peaking at 31.6 million in 2019 and then slowly declining to 30.4 million by 2025 — which is about the same as the 30.3 million on Jan. 1 this year.

“Though profitability in the cow-calf sector is down sharply, it is still above historical levels. This will promote further small increases to the herd in coming years,” say FAPRI analysts.

The difference in cow numbers also helps fuel wide variation in expected prices between the two reports. USDA numbers have the 5-Area fed steer price at $141.75 per cwt this year, then mostly declining for the rest of the decade to $121.63 in 2025.

FAPRI pegs this year’s 5-Area steer price at $133.41 per cwt, declining to $116.72 in 2019, and then increasing for the rest of the projection period to $135.73 by 2025.

FAPRI estimates net cow-calf returns will be positive for the next 10 years, except for -$21.91 and -$14.02 in 2019 and 2020, respectively. For perspective, returns in the other years range from $211.53 per cow for this year to $9.63 in 2018, and then back up to $60 by 2023.

If FAPRI’s net return estimates are anywhere close to the ballpark, it would represent historically positive performance, but be a far cry from the extraordinary circumstances of the past couple of years.

So, a renewed focus on costs makes sense at the producer level. It also makes sense from an industry standpoint.

Both USDA and FAPRI estimate domestic beef production will grow by more than 2 billion pounds over the next decade.

According to FAPRI, per capita beef consumption for the next 10 years will range from 54 to 57 pounds (retail weight), with the combined per capita beef consumption of beef, pork and poultry at mostly 212 to 215 pounds.

USDA projections have per capita beef consumption mainly at 55.2 to 56.8 pounds, and total red meat and poultry consumption per capita at 213.2 to 219.2 pounds.


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