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2021: Another roller coaster year for the livestock industry

For the cattle industry, 2021 was a roller coaster. From unpredictable prices to fighting proposals that could have a disastrous impact on producers, the industry weathered several ups and downs throughout the year.

Todd Wilkinson, who operates a cow-calf and feeding operation in South Dakota, has experienced the issues firsthand. As the vice president of National Cattlemen’s Beef Association (NCBA), Wilkinson has also heard from producers across the country about their struggles.

As the owner of Wilkinson Livestock, Wilkinson says his biggest hurdle has been the unpredictable price of live cattle, cashing out anywhere between $112 per hundredweight and $139 per hundredweight. Rising feed costs made getting an efficient rate of return difficult when evaluating how many head of cattle to buy. The 2021 market also had producers stuck at the same price range for months.

Don Close, a senior animal protein analyst at Rabo AgriFinance, says that, as far as price, this year was good for packers and grocers. According to the Bureau of Labor Statistics, prices for grocery store beef rose 20.1% between October 2020 and October 2021. Yet, producers didn’t see a bump until the second half of the year.

In a normal year, cattle prices spike in April, then fall off in summer before rising again during the winter. This year, the first quarter saw high market prices but a price plateau from May to October, rather than a spike and drop. 

“It’s been frustrating for producers, because they saw record-high retail prices for beef and record-high packer margins, but they weren’t able to get their slice of the pie,” says Close. “However, the price levels for the second half of this year have been incredibly strong.”

Over the past eight weeks, the price for feedlot cattle has risen $20 per hundredweight, according to Close. His year-to-date average estimate for live cattle is $121 per hundredweight.

“Market conditions have improved considerably in the last two months,” says Wilkinson. “We are looking at some pretty favorable economic estimates on the rate of return for our cattle.”

An Atypical Production Year

This year’s drought also caused many producers to shuffle their buying and selling rotations. Ordinarily, Wilkinson purchases cattle to put in the feedlot in May and June. Because there was uncertainty about feed, that lot sat empty.

“We would typically be marketing fat cattle in December, January, and February,” says Wilkinson. “We didn’t fill our facility because we were worried about being able to find corn at a reasonable price to feed the animals. Now, we have no cattle to market.”

Even though many producers like Wilkinson had to skip a cycle, that brief retraction provided them with some leverage when dealing with meat packers. Farmers had a better negotiating position and were able to ask for more of a premium. Wilkinson is also optimistic about negotiations with packing plants over the next two to three years, so much so that he plans to expand his herd of 8,000, to a yet-undetermined number.

“Going forward, I think we’ll see some additional packing capacity come online,” says Wilkinson. “That’s going to be helpful for the industry because the contraction in shackle space over the last 10 years in particular puts you at a competitive disadvantage when you negotiate the sale of your cattle. With the contraction in cow herds and new plants coming online, I have to believe a feedlot operator will be in a better position to get a good rate of return on his business.” 

Due to a contracted national herd and fewer calves to sell, Close expects next year’s market to be counterseasonal, with fourth-quarter prices much higher than in the first quarter.

“Heading into this counterseasonal year, my biggest worry is that while we could be looking at phenomenal cattle prices, certainly higher than anything we’ve had in the last five to seven years, cattle feeders are really not going to make a lot of money because feed costs are still so high,” Close says.

Cattle Industry on the Hill

Like many producers, as Wilkinson ages, he’s looking to transition his operation – both the land and the cattle – to his son and daughters. When the American Families Plan was announced in April, the Biden administration proposed changes to several provisions of the federal tax code to pay for it, which could have had a profound impact on farm families.

To fund Biden’s roughly $1.8 trillion plan, tax provisions on the chopping block included stepped-up basis and like-kind exchange. Stepped-up basis allows a beneficiary to use the market value of the assets at the time of benefactor’s death. A like-kind exchange allows one asset to be disposed of and a similar one to be acquired without creating a capital-gains tax liability. Both are critical tools farmers and ranchers use when managing their business or planning to transfer to the next generation.

Although exemptions were proposed for family-owned operations, including farms and ranches, NCBA believed there was no way the exemptions would work because of the unique structure of these businesses and the diverse transfer circumstances on each. Rather than settle for exemptions, NCBA knew the only way to ensure certainty for current and future farmers and ranchers is through full preservation of federal tax policy that facilitates a viable business climate.

“If I can’t pass my farm down to the next generation without them paying significant taxes, it would put a small operation like ours completely out of business,” Wilkinson says. “Hopefully, we can get rid of this proposal for good.”

After Biden announced his plan, legislation was introduced by members of Congress that, again, called for significant restrictions to stepped-up basis and a decrease in the estate tax (Death Tax) exemption.

NCBA successfully fought hard against these measures on the House side. Negotiations continue on the Senate version of the bill, and the association says it will keep fighting to preserve key tax provisions.

“A proposal like this could have a disastrous impact on cattle producers in a time when, as an industry, we are transitioning or expecting a transition in about 40% of operations to the next generation within the next 15 years,” says Ethan Lane, NCBA’S vice president of government affairs. “Our work on this proposal really culminated into one of the largest grassroots campaigns this industry has ever launched.”

The wins in 2021 have set the stage for 2022 to be a competitive year. Those victories have also given Wilkinson a reason to be more optimistic about the future of the industry – a feeling he hasn’t had for several years.

“Farming is so capital-intensive for a young producer to get involved in,” Wilkinson says. “If he can see a positive economic return forecast, it’s a little easier for him to make it his life’s work.”

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