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Calf profits shrink

Agriculture.com Staff 09/08/2008 @ 9:42am

If the cattle cycle isn't dead, it's at least on life support. That's what market experts told ranchers at the annual CattleFax Outlook Seminar last winter.

This summer, after more wild weather put a further crimp in the plans of farmers and beef producers, CattleFax Outlook specialist Kevin Good said of the cattle cycle, "you can stick an even bigger fork in it." At a time when we expected to be building cow numbers, we're liquidating, he says, and what that means to long-term cattle prices is the $64,000 question. (CattleFax is a producer-owned organization providing market analysis to its members).

Two years ago, after several profitable years for cow-calf producers, experts thought the cattle business was headed into a multiyear expansion cycle. That outlook was blindsided primarily by two things, according to Good and his CattleFax colleagues: Weather and escalating energy prices.

The weather issue involves both extremes -- drought and floods. Prolonged drought has decimated some cow herds in the southern Plains and the Southeast, where 25% of the U.S. beef cow herd is located.

The Midwest floods have further driven up the price of corn and other feed ingredients, prices that were already at record levels because of ethanol and export demand.

Runaway grain demand works a double whammy on cattle herds. The total cost to produce a finished steer has gone up by $150 to $200 in the last two years. And some pasturelands have been converted to row-crop acres in search of better profits.

CattleFax's Good lists several other factors that are negative to growth of the beef cow herd:

  • Escalating land values don't favor forage production.
  • Recreational land use discourages livestock production.
  • Federal lands use policy has discouraged grazing.
  • The average age of producers is increasing.

As a result, at a time when the nation's cow herd should be growing, it's declining, and the spring calf crop was the smallest in over 50 years. "We're in liquidation mode, and it will probably continue into 2009," says Good.

His price outlook for 550-pound calves this fall and winter is for slightly lower than last year, when they averaged about $1.18 per pound. That price is probably being supported by the price for finished cattle, which at $1 per pound is a few cents higher than he predicted last winter. Futures prices for next year are even stronger, near $1.10 per pound.

"Without that strong fed market, calf prices would probably be lower this fall," says Good. He expects profits per calf to be about $25 for average producers. While that's still in the black, it's a far cry from $100+ profits of recent years.

Declining beef supplies and inflation will take beef prices higher in the supermarket, and those prices will work their way back through the supply chain to the calf market. Whether it will take two, three, or more years is anybody's guess, he says, depending on the political climate and the general economy. "Will we be dealing with $4, $5, $6, or $7 corn?" he asks.

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