Bulls all around: Good news for cattle producers
Is the cattle cycle swinging back around to the high side? Recent record-high cattle prices will likely start making that happen soon, says one longtime livestock economist.
It's been a while since cattle herd numbers have been as low as they are now; more than 60 years to be exact, according to Purdue University Extension ag economist Chris Hurt. Specific to the beef herd, it's at its smallest since 1962 and in the 7th year of the most recent downturn in numbers.
"The most recent phase of the decline began in 2007 as a result of two basic drivers. First, sharply higher feed costs forced cattle feeding into large losses which depressed calf prices and secondly, drought conditions in major beef cow production areas also caused herd reductions," Hurt says.
How "major" were those reductions? In 2013 alone, producers cut beef cow numbers by 253,000, about 1% of the herd. Just shy of half of that number came in the southeastern part of the country, where drought damage has been worst in the last 2 years.
Though profits have been healthy for beef cattle producers for a while now, it's taken the industry a while -- as it typically does -- to respond, Hurt says. And, there are still a lot of questions as to how exactly the industry will respond. And that will influence how current profit levels evolve in the next year or 2.
"The recent USDA Cattle inventory update suggests the industry has barely begun the expansion process, if at all. Beef heifers being retained for beef cow replacements were up nearly two percent, but this may be too small to increase beef cow numbers during 2014. The total number of heifers being retained for breeding was only 90,000, which represents less than one percent of beef cow numbers and is the smallest number of retained heifers in the past three years," Hurt adds. "The question of whether the beef cow herd will grow or continue to decline in 2014 will also depend heavily on the rate of cow slaughter. Some cow/calf operations will see 2014 as the golden opportunity to get out with record high cow prices. But the greater tendency will be for producers to hold on to the cows for the profitable opportunities that are expected over the next three or more years."
Expect the industry's expansion to remain on the slow and conservative side for the time-being and through the next year, mainly because the cost to do so will stay fairly high. But, Hurt's bullish for about the next 3 years.
"Regardless, any increase in beef cow numbers is expected to remain modest in 2014 for at least three reasons: 1) The costs to retain heifers is very high; 2) Cow/calf producers had a long period of narrow margins and they want a longer period of strong margins to build their confidence to take on the market uncertainties, and 3) Drought/dryness still covers substantial areas of brood cow production areas," he says. "The price outlook is extremely favorable for 2014 to 2016 for the beef industry. Beef supplies this year are expected to be down five percent. Domestic demand is expected to remain positive with some continued income growth in the U.S., but USDA does anticipate beef exports will be down eight percent with the very high U.S. beef prices. There also will be greater competition from two percent more pork and turkey and three percent more chicken. However, the low beef supplies will dominate these drivers and likely push cattle prices to another record high year."
Now, let's talk numbers: Hurt says he expects finished cattle to average beyond $130/CWT this year, about $5/CWT higher than through 2013. It will fluctuate -- in some ways different than normal seasonal price swings -- but the general trend should be higher.
"The extremely high prices in January 2014, around $143, are expected to moderate to an average of about $140 in February and March. Then prices may move down seasonally to a second quarter average in the mid-$130s before reaching the lows of the year in the third quarter close to an average in the very-high $120s," he says. "The final quarter of 2014 is expected to have prices in the low-$130’s. Strong prices are expected to continue into 2015."