Shrinking cattle supplies, higher input prices for 2012

Feb 10, 2012

Cattle supplies will remain tight as global demand intensifies in the year ahead, bringing higher profit margins for cattle ranchers, according to CattleFax Chief Executive Officer Randy Blach.

“The economic signals are in place for restocking to begin this year,” Blach told members and guests at the National Cattlemen’s Beef Association (NCBA) Convention in Nashville, TN. “All we need now is a little encouragement from Mother Nature.”

Blach told a packed audience that he expects cattle inventory numbers to decline slightly in 2012 and reach a low point in 2013 before increasing in 2014 and beyond. Although herd growth may remain elusive, an increase in average carcass weights will partially offset the decline in inventory numbers, he said. The decline in cattle numbers means prices can be expected to move higher in 2012.

The transition from herd liquidation to expansion will decrease feeder and fed cattle supplies by 1.5 million to 2 million head, Blach said, “forcing the industry to address excess feedlot and packing plant capacity.”

Blach also addressed capital issues, advising that access to adequate lines of credit is more critical to operating a cattle business today than at any other time in history.

It takes 60 percent more capital to operate a cow/calf entity today than in 2000 and even more to operate a feedlot today, according to Blach. Assuming a 20 percent equity requirement to own and feed cattle, an investment in feeding cattle has increased from $170 per head in 2000 to more than $300 per head today, he said. According to Blach, these numbers confirm that credit will be the key to success for most operations in 2012.

According to the CattleFax 2012 Industry Outlook report and executive summary, higher calf prices and more precipitation in the South will slowly transition the industry back to expansion. The report confirms Blach’s prediction that fed cattle supplies will likely be even smaller in 2013 because of the reduced 2012 calf crop and an increase in heifer retention.

Tight supplies of cattle and beef will be compounded by continued growth in the export markets, with expanded access into Japan and continued increases in the volume and value of beef being sold into export channels, according to Blach.

Beef exports were up 23 percent in 2011, compared to 2010, and the report predicts exports to improve an additional 11 percent in 2012 with improved beef access to Japan and an increase in beef demand in wealthy international economies.

Blach said Japan won’t be the only export market to see significant growth during 2012. In fact, U.S. beef exports, which set records in 2011, will likely set new highs in 2012 as a result of strong overall global demand and continued weakness in the U.S. dollar.

Larger corn supplies in 2012 are expected to drive prices significantly lower, according to CattleFax analysts. In 2011, the higher corn prices, and record low supply, offset some of the benefits of higher cattle prices.

Art Douglas of Creighton University told the NCBA group that despite the three months of near-normal rainfall in parts of Texas, the drought will still play a role in cowherd expansion. Douglas expects much of Texas to return to dry conditions by late spring or early summer. He also said he expects the drought to spread into southern California, the Northern Plains and coastal areas of the southeast U.S.

Drought conditions are expected to continue throughout 2012, according to the CattleFax report.

The Northern Plains has had a mild, dry winter, and the trend is expected to continue through March.

The center of the 2011 drought seems to have moved away from Texas and is now reforming over southern California, the Northern Plains, and coastal areas of the Southeast. Texas has seen normal rainfall for much of the winter, but CattleFax’ 2012 Weather Outlook calls for the region to turn dry again in late spring.

According to the report, the La Nina weather pattern the world has been seeing is shifting, and some areas are seeing signs of El Nino returning. “Australia has already started to dry, common with a developing El Nino,” the report says.

“Forecasting ability for El Nino improves after March, but for the past couple of months, the analog forecast system has been hinting at possible El Nino conditions by mid-spring,” the report says.

According to Cattle Fax, a shift towards El Nino would favor the following weather patterns: • Normal rainfall and temperatures in the Corn Belt for summer; • Development of drought in Australia by midyear; • Improved winter rainfall in Argentina after a fairly hot, dry summer potentially slows wheat planting; •Improved fall and winter rainfall across the Southwest and South with an increased chance of strengthening drought conditions in the Pacific Northwest and Northern Plains. — Traci Eatherton, WLJ Editor