KAYS korner

Jul 1, 2011

A bright future

I recently had the privilege of addressing California beef producers at their midyear meeting. The state has had one of its best spring grass seasons in years, so everyone had a smile on his or her face. I hope what I told them made them feel even better.

My talk was titled “Issues and Opportunities.” I told them that beef demand remains the top issue because all wealth to their industry comes from consumers. Retail demand was up 9.3 percent in the first quarter but this won’t be repeated and demand might turn negative by late summer. Consumers face a weak economy, high energy prices, and record-high retail beef and pork prices. They might buy more chicken, although I suspect they will also buy cheaper beef cuts.

The second issue is severe to extreme drought, which has forced herd liquidation. The drought affects the southern Plains, part of Nebraska, Colorado, Alabama, Georgia and Florida, and has put 20 percent of the national beef cow inventory under drought. Beef cow slaughter year-to-date is down 4.4 percent but Region 6 (which includes Texas) slaughter is up 11.7 percent. About 100,000 additional cows have been culled so far. So the national beef cow herd might decline 1.5 percent this year. This means another year of herd contraction. Meanwhile, Mexican cattle imports are up 27 percent because of severe drought south of the border.

The third issue is corn prices, which are twice as high as last year. Drought has also affected corn prices, as the worst affected areas account for 1.3 billion bushels of corn. Flooded areas account for another 540 million bushels. Corn prices will go higher if this year’s crop falls below 13 billion bushels. The Senate vote to end ethanol subsides was welcome. But the measure might not go further and won’t affect corn prices as ethanol’s use of corn is much more determined by the federal E15 mandate. High corn prices have already eroded cattle feeding margins and will cause big losses on unhedged cattle/corn. These losses and corn prices will put a ceiling on feeder cattle prices. The next issue is lack of market access. The U.S. industry is still leaving $1 billion on the table, which is 25 percent of 2010 export values. The Grain Inspection, Packers and Stockyards Administration rule also is a huge issue and remains so until it is withdrawn or radically rewritten.

After outlining these key issues, I was happy to turn to the opportunities. I cited the declining U.S. and the flat global beef supplies that coincide with better demand at home and abroad. This already led earlier this year to high wholesale beef and record byproduct prices, and record high cattle prices. Global cattle numbers will remain flat and the U.S. faces a sharp decline in per capita beef supplies in 2012. Meanwhile, Asian markets continue to import more beef and China looms as a new buyer of U.S. beef.

In support of this, I noted that U.S. and Canadian cattle numbers declined 4.888 million or 3.4 percent in the last three years. Producers show no signs of expanding their herds.

Drought, corn prices, high costs, aversion to risk and market/economic uncertainty are the key inhibitors. So the U.S. herd might shrink to 92 million head by Jan 1, 2012. The herd is already the smallest since 1958.

This decline led to record cattle prices this spring, and prices are now in a new trading range. The range for live cattle going forward will be $100-125 per cwt while the range for feeder cattle (basis an Oklahoma City 700-750 steer) will be $125-135. Excellent grass conditions prevail from Montana to California and this will offer cheap costs of gain and will keep cattle outside feedlots longer. It will also encourage more heifer retention and herd expansion in some states.

Beef per capita supplies in 2011 will be 55.6 pounds per person, the lowest in 60 years. That’s a decline of 4 pounds in two years. This will boost domestic and imported prices for muscle meats and manufacturing beef (which will boost cull cow prices). Beef exports in 2011 will total 2.52 billion pounds, topping those in 2003. They are already higher in value than in 2003.

Producers have a bright future because there will be a domestic and global beef shortage, I told the group. Yet more people around the world are eating meat as their standard of living improves. At the same time, the lifting of exports restrictions will increase U.S. exports. I noted the tremendous advantages that the U.S. industry has—a highly productive cow/calf sector and extremely efficient cattle feeding and beef processing sectors. I noted that the U.S. is by far the largest producer of high quality, grain-fed beef. I told the producers that they are the key to producing one of the most sought-after food products in the world. I urged them to take advantage of this and expand if possible. I hope other producers do as well. — 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.)