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Cattle profits ahead...with a big 'if'

The drought hit, the market spoke and producers listened, at least to the latest cattle inventory numbers from USDA.

The severe conditions of last summer that forced massive liquidation in just about every corner of cattle country was the culmination of a 5-year cut that's seen the beef herd drop 11%, with producers in the southern and central Plains alone trimming almost 2 million head since 2007.

"The impacts [of the 2012 drought] were largest for producers in the Southern Plains where beef cow numbers dropped by 9% last year and in the central Plains where numbers were down 6%. These 2 regions had a decrease of 860,000 cows," says Purdue University Extension livestock economist Chris Hurt. "Likely some of those cows moved to the northern Plains where rain was more abundant and cow numbers expanded by 4%, totaling about 170,000 cows."

The drought-forced summer 2012 herd cutback effectively extended the cattle cycle; data leading up to the tipping point of the drought show producers were poised to begin expanding. Then, skyrocketing feed costs prompted by drought got in the way, Hurt says.

"A condition beef producers would like to see before expanding is some assurance that feed prices will have an overall moderation in coming years, not just a one year decrease," he says. "USDA found evidence among producers that they were getting positioned to begin expansion. The number of beef heifers being saved for herd replacement was up 2%. There is a general feeling that cattle prices could be very strong in coming years due to small per capita beef supplies. If weather moderates, several profitable years are anticipated for cow-calf producers."

A couple of conditions have been established now, Hurt says, that could set the cattle cycle and corresponding markets on a potentially more normal course in the next few months. First, inventories were cut enough last summer and fall that now, expansion is almost inevitable, provided the right weather, Hurt says. And, that will fuel higher prices.

"Finished cattle prices should strengthen into the spring as beef supplies drop. These smaller beef supplies are related to both a small cow herd which means a small number of calves available and to the pace of feedlot placements that dropped sharply beginning last July due to higher feed prices resulting from the drought. Placements from July through November last year were down 12%. This will create a period of reduced marketings from feedlots in the late winter through mid-summer," Hurt says. "Smaller finished cattle supplies due to the small placements last summer and fall provide the opportunity for finished cattle prices to rally back toward the mid-to-higher $130s this spring and early summer. Prices are expected to be in the higher $120s this summer and then strengthen in the fall to the low-to-mid $130s. If weather helps restore feed and forage supplies this summer, a more aggressive expansion of beef heifers should be anticipated beginning in the fall of 2013 and continuing into 2014. If this does occur, it will set the stage for very strong calf prices and new record high prices for finished cattle in 2014."

It all adds up to a relatively bullish outlook for cattle prices for a while...with one big caveat.

"If crop and forage production returns to near normal, the cattle industry is poised for multiple years of favorable returns and expansion. However, everyone watching the 'Drought Monitor' knows that much of the country has not yet returned to normal weather conditions. Beef cattle producers will be poised to expand when weather conditions improve," Hurt says. "Unfortunately for the beef industry, both poultry and pork producers are waiting at the start line as well. Those industries can expand production much more quickly and will extract market share from beef during the period from late 2013 to 2016."

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