KAY'S korner

Apr 30, 2010

The other side of high prices

“Tough news if you’re a meat lover,” said the headline on my Internet news page last Monday. Oh no, I thought, not another negative story about how eating meat is bad for you and the planet. Turns out I was wrong, but the reasons for the headline are what’s got everyone in the industry buzzing right now.

I’m referring of course to the remarkable spring rally in wholesale beef prices, from cuts to fatty trim. The rally, as you know, has spilled over nicely into the fed, feeder and calf markets. Pete Crow in his column last week comprehensively covered all these elements so I won’t repeat the reasons. I’m more interested in looking at the repercussions of the current high prices, both positive and negative.

The positives are obvious.

Cow/calf producers, cattle feeders and packers are all making money at the same time. That’s mighty rare in this industry. It is especially notable because no one foresaw the tremendous rally in wholesale beef prices in March and April. Cow/calf producers are also reaping the benefits of the fact that they have reduced their cowherds in recent years.

The surge in prices and relatively stable production costs have caused analysts to raise their estimates on

cow/calf returns this year. Returns might now be more than $50 per cow, says the Livestock Marketing Information Center (LMIC).

That’s after returns were negative by $34 per cow in 2009 and negative by $18 per cow in 2008. Cattle feeding margins were also positive in February and March, marking the first quarterly profits since 2007’s second quarter, says LMIC. January saw margins negative by $66 per head but they were positive by $20 per head in February, the first profitable month since May 2007. Margins were positive by $71 per head in March. Current fed cattle price levels continued to provide positive cattle feeding margins in April of more than $100. So 2010 is already looking much brighter for the production side of the industry.

Cow/calf producers are also enjoying their best pasture conditions in some years. But whether the positive returns and green grass will provide a green light for producers to expand is still uncertain. Producers were extremely cautious during the past decade. The U.S. cattle herd saw eight years of liquidation until 2007 and then only three years of modest expansion before liquidation began again.

The result is that the U.S. cattle herd declined by 2.3 million head from Jan. 1, 2008, to Jan. 1, 2010. The entire North American herd has shrunk. The total population for the U.S., Canada and Mexico declined by 3.8 million head during the same period. The shrinking herd has exacerbated the over-capacity issues facing the cattle-feeding sector. The 10.77 million head on feed April 1 revealed a 64 percent occupancy rate in feedlots 1,000 head or larger.

As yet, there are no signs that cow/calf producers are in an expansion mood. The opposite still seemed the case in the first quarter. Fed heifer slaughter was 4 percent larger than in the first quarter of 2009. In addition, first quarter beef cow slaughter was 8 percent above last year. The larger heifer slaughter showed that ranchers did not hold back young females to rebuild their herds. Maybe a positive year in 2010 will see net heifer retention.

In the meantime, competition for cattle to put on feed will remain intense. That’s good news for cow/calf operators but not such good news for cattle feeders. Ironically, should producers start to hold back more heifers than they sell, this will take more cattle away from feedlots and packing plants. It will take three years for more cattle to start being available for feeding and slaughter.

As for the rally in wholesale beef prices, it is a given that these prices will force retail prices sharply higher, hence the headline of the story I read online. I have warned all my beef-eating friends to stock up their freezers now because I’m convinced retail prices will go up sharply after the big Memorial Day holiday. In fact, some huge beef sellers, such as Wal-Mart, have already started to increase their everyday prices on some items. Retailers will not be featuring beef aggressively for Memorial Day.

How consumers respond to much higher prices in the meat case is of concern. I read stories every few days about how consumers are spending more. But none of these stories mentions people are spending more on meat. They’re buying new cars, new clothes, repainting their house and so on. In other words, they’re making purchases they delayed last year, purchases that make them look and feel better. Meanwhile, the unemployment rate is still stubbornly high at 9.7 percent and there are still a lot of under-employed people. There might be an awful lot of beef lovers who find that their favorite steaks are out of their price range in June. — 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.)