KAY'S korner

Opinion
Sep 2, 2011
Nature can be cruel

Cow/calf producers and stocker operators in western and northern states are enjoying one of their best grass seasons for some years. Contrast this with the dire conditions in Texas, Oklahoma, parts of surrounding states and all the way to Florida. Drought has devastated pasture in virtually all of the Longhorn State and many producers have run out of feed and water for their cattle. It’s a testament to their resilience and refusal to quit that whole herd liquidation has not been larger to date.

Producers are spending many thousands of dollars on hay and water, on transporting young cattle to backgrounding lots or to pasture in other states in an effort to have something of a herd when the drought breaks. I say “when” because it will eventually, but the near-term forecast is bleak in terms of meaningful rain. So the Texas drought looks set to go into its second year. Herd liquidation will continue into the fall and more producers will be forced to exit the business.

The drought’s consequences have already shown up. In Texas, the cost to the livestock industry from Nov. 1, 2010, to Aug. 1, 2011, was $2.1 billion. This was part of a record $5.2 billion in livestock and crop losses, including lost hay production. I’ve not seen estimates of drought-related losses in other states, but they are likely in the hundreds of millions of dollars.

Another consequence is that drought forced many more cattle than expected into feedlots in June, July and August. This means a much different live cattle marketing picture for late 2011-early 2012 is emerging compared to what was forecast a few months ago. Early forecasts were for supplies of market-ready cattle to tighten appreciably in the fourth quarter and 2012’s first quarter. Now there are concerns that a rapidly growing frontend supply might be a problem until April next year.

Beef production is therefore expected to be larger than expected from now through the end of the year. That’s especially so in the fourth quarter. Analysts at the start of 2011 had forecast fourth-quarter production to be down 3.5 percent or more on 2010. They now forecast production to be down as little as 1 percent. They had also forecast third-quarter production to be down slightly on last year. They now forecast it might be up slightly. Continued heat in cattle feeding country might continue to slow the seasonal increase in carcass weights and reduce production. But this might be balanced by continued additional cow slaughter due to drought.

The drought’s longer-term consequences are even more profound. It is forcing continued liquidation of the beef herd when many had hoped for stability this year. The total herd might be as small as 91 million head by the start of next year, versus 92.6 million on Jan. 1 this year.

Numbers are unlikely to stabilize even next year, so overall herd rebuilding might not start until 2013. This has serious consequences for feedlot occupancy and feeding margins, especially if corn prices hit $8 per bushel. It also has consequences for beef processing plants, especially cow plants. These plants are already processing cows they might not have seen well into the future and cull cow numbers might decline significantly next year.

USDA’s midyear cattle inventory report showed that total cattle and calf numbers in the U.S. on July 1 were down 1 percent from a year earlier. Beef cow numbers were also down 1 percent but more significantly, beef cow replacement numbers were down 4.5 percent. These heifers, instead of being retained for herd rebuilding, went to feedlots for finishing and then to slaughter. These declines, plus an expected 0.5 percent decline in the 2011 calf crop

and ongoing liquidation due to drought, means the U.S. herd might decline this year by as much as 1.6 million head. This would make the herd the smallest since 1958.

The drought is also causing a significant structural change in the national cow/ calf herd. Drought in the Southwest and across the south is forcing producers to reduce or liquidate their herds. But producers in northern and western states are adding numbers because of excellent pasture conditions. This trend first showed up in January’s annual inventory report. Texas, by far the largest cow/calf state, saw its beef cow numbers decline 115,000 to 5.025 million on Jan. 1 from a year earlier. Oklahoma, Florida, Arizona, New Mexico and all the southern tier states also had declining beef cow numbers. Conversely, Washington, Oregon, Idaho, North Dakota, Kansas and Colorado all saw an increase in 2010 in beef cow numbers. Analysts expect such increases to continue this year, as well as in California. Nature’s cruel and capricious nature is reshaping the beef industry as never before.

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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