Mixed signals on cattle inventory cloud beef's future
Increased replacementheifer inventories may not be sufficient for cow herd expansion in the face of the large numbers of cows being slaughtered. La Ni a remains in place and could adversely affect any expansion plans. Continued negative profit margins for cattle feeders and meat packers, along with consumer resistance to higher retail prices, would also put an upper boundary on expansionary enthusiasm. Positive factors are record feeder cattle prices, growth in natural and organic beef sales, and increasing beef exports.
The January 2012 Cattle Inventory Report indicated 1 percent more beef replacement heifers expected to calve in 2012 than in 2011, or about 37,300 more heifers expected to calve in 2012. However, in the case of heifers expected to calve, the 1 percent higher number is from a previous-year base that was already low.
In the January 2011 report, 7 percent fewer heifers were expected to calve than were expected to calve in 2010, or about 245,000 fewer heifers, leading to 2011’s smallest number of heifers entering the herd since 2005. Thus, for the two years 2011 and 2012, beef heifers expected to calve were down by a net decline of over 200,000. In addition, beef cow numbers declined by a half-million from Jan. 1, 2010, to January 2011, and by another 966,700 head from January 2011 to January 2012.
A year-over-year decline of 967,000 beef cows (offset by a 1 percent increase in dairy cows) is not likely to be offset by 37,300 more calving replacement heifers, especially following large declines the previous year. Thus, the question remains: do the heifer inventory changes indicated in the January 2012 Cattle Inventory Report mean that an expansion in the beef (or total) cow herd is underway?
A number of factors affect motivation for an expansion in beef cow numbers. These include prospects for future steer and heifer calf prices, feeder cattle prices, fed cattle prices, cutout values, and retail beef prices, as well as prospects for costs or profit margins at every level, the state of the beef trade and the occurrence of drought. Despite a very positive outlook from the cow/calf producers’ perspective, it is not clear that larger cattle inventories are in fact economically sustainable from an overall industry profit perspective.
On the positive side, supplies of feeder cattle outside feedlots—which include imported feeder cattle from Mexico and Canada—declined by 3.9 percent from Jan. 1, 2011, to Jan. 1, 2012, the steepest decline since the discovery of bovine spongiform encephalopathy in Canada resulted in reduced U.S. imports of Canadian feeder cattle during 2003-2004. Demand for feeder calves has pushed recent feeder cattle prices to record highs.
At the same time, Jan. 1, 2012, cattle on feed inventories are among the largest for the last decade. Cattle feeders placed more cattle in the first three quarters of 2011 than in the same quarters in 2010, and placed only slightly fewer cattle in fourth-quarter 2011 than in fourth-quarter 2010. This occurred for two reasons— initially, placements were motivated by anticipated reduced supplies of fed cattle in the hope of higher fed cattle prices in the future, and later, placements were made in response to the decreasing forage supplies due to the worsening drought.
Retail beef prices are at record levels, but these prices are not sufficient to provide the long-term margins and profits the wholesale and cattle feeding sectors must have in order to sustain an expansion. There are signs that consumers are beginning to resist the escalating retail prices. It is not clear how much higher beef retail prices can go with pork and poultry so much less expensive. Both cattle feeders and packers have absorbed negative margins for most of 2011 and thus far into 2012.
As La Ni a continues to exert weather patterns similar to those that existed into 2011, placements of feeder cattle in feedlots could continue to be motivated by lack of forage outside feedlots. Further, given the short supplies of feeder cattle outside feedlots, feedlot owners—who have to cover fixed costs of feedlots, unlike cattle feeders for whom overhead is a variable cost—are likely to continue to encourage placements of any cattle in order to lower their costs, which may lead to greater placements of more-readily available lighter weight and younger cattle.
Cattle feeders, on the other hand, will likely be motivated to place relatively high proportions of lighter and younger feeder cattle in anticipation of positive profit margins in future months. Within bounds, pulling cattle forward could continue at the margin into 2014 or 2015, or until feeder cattle supplies once again reach levels that will allow lighter weight cattle a chance to first grow on pasture before being placed in feedlots. This will be modulated by increases or decreases in feed costs, weather and other factors over the same period.
Expansionary activity will also depend on cow/calf producers’ inventory management strategies, to the extent they will be willing to hold on to heifers for breeding herd replacements vs. letting them go as feeder cattle for placement in feedlots. Heifers are currently selling at prices less than $10 per cwt below steer prices for similar weights. These price differentials at current price levels will provide significant incentive to producers to sell heifers as feeder cattle rather than retaining them as breeding herd replacements. Heifers sold as feeder cattle reduce the impact of declining supplies of feeder cattle outside feedlots, but prolong the time before calf crops can catch up to the demand for heavier feeder cattle.
Cattle feeders have endured negative margins since April 2011, the last month to show a positive margin. Despite expectations of somewhat higher fed cattle prices in 2012 over 2011, until corn and/or feeder cattle prices decline, cattle feeding margins— anticipated at or below breakeven levels of $125- $130 per cwt—are not likely to encourage cattle feeding, even by feedlot owners seeking to reduce overhead costs. The scenario is exacerbated further by a stillunimpressive economic recovery and a general trend of producing more beef from fewer cows, despite belowtrend average dressed weights during 2010 and 2011. With La Ni a remaining in place, the potential for another dry year could also adversely affect expansion plans, particularly in southern-tier states.
Negative feeding margins have been the result of escalating feed costs, up by as much as a third or more over the past year, and feeder cattle costs that have increased by over 20 percent. On a per cwt basis, the current upward trend in monthly average fed and feeder cattle costs began in January 2010 and by the end of January 2012 had increased by 72 percent. At the same time, monthly average Texas/Oklahoma/New Mexico fed cattle prices rose by 44 percent.
Some analysts have alluded to excess capacity in feedlots and packinghouses as a major cause of the negative margins. The negative margins for cattle feeding and feed yard closures in New Mexico and the Southern Plains, for example, and the apparent reduction in cattle feeding in lots of less than 1,000 head tend to support the notion of excess capacity. However, the expansion of larger feedlots contradicts that notion.
The notion of excess meat packing capacity is similarly characterized by conflicting information about packinghouse closures and openings/reopenings, the recent announcement of the reopening of the refurbished beef packing plant in Tama, IA, being an example. At the same time, there is further evidence of excess capacity in observations of $100 per carcass losses, reduced kills, and reduced hours of operation.
At the same time, small, custom-slaughter facilities appear to be struggling to keep up with more local cattle slaughter and processing of “natural” beef and organic beef. At least some, if not most, of this beef is sold at farmers’ markets, a rapidly growing segment of the beef industry.
Despite the economic challenges consumers have faced during the past couple of years, this growth has continued. Data characterizing this growth in natural/ organic beef sales are hard to find. However, citing scanner data summarized by the National Cattlemen’s Beef Association, the Agricultural Marketing Resource Center (AMRC) relates that the retail share of natural and organic allfresh-beef sales has increased from 1.1 percent in 2003 to 4.2 percent in the first quarter of 2011, although AMRC cautions that part of the increase in the share of retail sales is due to price increases over the same period. However, Economic Researach Service data indicate that the 31 percent increase in all fresh retail prices for the same period, from $3.31 per pound for all of 2003 to $4.35 for first-quarter 2011, accounts for only a small portion of the nearly fourfold increase in growth of retail sales of natural and organic beef. — Rachel Johnson, USDA