KAY'S korner

Opinion
Nov 6, 2009
Industry faces shrinking numbers

 

The U.S.’s shrinking cattle population is becoming a huge concern for the beef industry. The main reason for the declining numbers is lack of profitability. Cattle feeders in particular have lost billions of dollars in equity in the past two years. The main reason for this is high input costs and weak beef demand due to the recession. The discovery of the H1N1 flu has been another depressant, as more pork has remained on the U.S. market and pressured beef prices.

Beef and especially dairy cattle producers are reducing their herds in light of negative margins. Smaller numbers are creating dozens of empty feedlots, many of which are searching in vain for buyers. Several huge dairy operations are going out of business. Packers are running their plants five days per week, with only modest Saturday kills. They used to run a full six days. Several plants may be forced to close in the next 12 months because of a lack of cattle.

The irony is that beef demand will likely begin to improve in 2010. But the reduction in cattle numbers means the U.S. might not be able to take full advantage of this. Demand outside the U.S. might improve more than in the U.S. Japan is expected to relax its age restriction on U.S. beef (from under-21-month cattle to under-30-month cattle). This would qualify 90 percent of the cattle that produced the U.S.’s 2003 exports to Japan. Right now, the age restriction and lack of age verification mean exports are still far below 2003 levels. Exports in 2008 were only 20 percent of 2003 exports and 2009 exports are likely to be only 25 percent of 2003 levels.

Demand would also improve if China agrees to lift its ban on U.S. beef. China is the third largest beefeating nation in overall consumption. But per capita consumption is small at 10.5 pounds per person. In contrast, consumption of pork is 74 pounds per person. China could become a $500 million market for U.S. beef within two years if it lifts most of its restrictions, says international trade specialist Chuck Lambert, who formerly worked for the International Trade Commission, USDA and the National Cattlemen’s Beef Association. Others, though, wonder if the U.S. will have the beef supply if cattle numbers keep falling.

Industry has over-capacity

Even if beef demand improves, this won’t help plant or feedlot utilization. The national herd declined by 1.544 million head in 2008 and might fall by a similar number this year. That’s equivalent to the annual kill of the two largest beef plants, or nearly 12,000 head of daily capacity, based on a five-day week. It’s equivalent to 1.5 million head of cattle feeding capacity. Neither packing plants nor feedlots can afford to run at lower utilization levels than they currently are. The packing sector currently has a much better balance than feedlots between capacity, supplies and utilization. But that’s because it has sharply reduced Saturday kills.

Mandatory country of origin labeling (MCOOL), with discounts on imported cattle, is another reason why packers face declining numbers. Canadian cattle imports from Jan. 1 to June 13 this year totaled 554,800 head, down 234,000 head or 30 percent from the same period in 2008. This meant 85,750 fewer slaughter cattle and 143,900 fewer feeder cattle came south. Cattle feeders can ill-afford this decline, given the sector has at least 30 percent over-capacity. Feedlots on June 1 were only 62 percent full. MCOOL isn’t the only reason for the fewer imports. Canadian cattle numbers have declined in the past year. Also, more cattle are remaining in western Canada as the feeding economics there have improved.

Mexican feeder cattle imports are up 23 percent so far this year versus last year. But they are going against historically low numbers. Mexican imports have averaged 1 million head in recent years. But they totaled only 703,000 head last year and will be less than 1 million head this year.

Cattle feeders, already hurting because of high feed prices and weak beef demand, face higher corn prices later this year and next if forecasts about this year’s corn crop prove correct. Difficult planting conditions this spring mean yields will be lower than previously forecast, says USDA. As if this wasn’t enough, the federal government is considering a request to increase the amount of ethanol to be blended into gasoline. Corn prices would dramatically increase if the percentage increases from its current 10 percent to 15 percent, say two new studies. Right now, the odds are that the percentage will be increased to at least 12 percent.

This will make it even harder for cattle feeders and dairy producers to make money. So the U.S. cattle population, and the feeding and packing sectors will continue to shrink. Cow/calf producers who are expanding their herds will likely reap the rewards when beef demand improves and the scramble for cattle intensifies.

Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765- 1725. Kay’s Korner appears exclusively in WLJ.)

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