A preview of things to come

Markets
Jan 20, 2014

—The potential for herd expansion and what that means

Looking to the future is a common habit in these early weeks of a new year, but this year seems to be special in terms of that frequent pastime. Within the cattle and beef industry, there is a lot to be hopeful for and to look forward to—lessening of drought, a midterm election year, improving technology and opportunities—so perhaps that explains the increased optimism among an already optimistic group of people.

Following on the heels of WLJ’s theme of looking forward, the question of what the future holds for ranchers and the beef world was central to the International Livestock Congress’ conference, held last week in Denver. While many topics were covered by numerous leaders and experts within the industry, no activity was more prevalent than speakers breaking out their proverbial crystal balls and offering their insights into the future.

An expanding herd?

The question of whether or not the U.S. cow herd will be expanding was unsurprisingly an important one. Dr. Bill Mies of Texas A&M University and past Chairman of the Research and Education Committee of the National Cattlemen’s Beef Association, called it the question on everyone’s minds.

“The stars are aligned for expansion,” he said. However, he also pointed out the stars have been aligned for the past two years and nothing has come of it.

Some of the reason for that has, of course, been the drought in much of the Western states and fire, as well as recent high corn prices in the past two years. Efforts at heifer retention and herd rebuilding were stymied, and in those past two years, heifers held back for breeding eventually had to be sold.

But among those aligned stars in favor of expansion in 2014, Mies cited good grass in most areas of cow/calf country, high feeder calf prices, lower corn prices, record beef prices with beef still moving, and low debt involved in mature ranching operations.

He pointed out, however, that there are also market movers that oppose the potential for expansion. The age of ranchers and the increased labor necessitated by increased cow numbers was a big impact. Regulations and reductions in grazing acres and AUMs (animal unit months) on public grazing land are also an issue. But perhaps the most lasting is fear.

“For those ranchers who went through the drought of 2011—who saw for the first time their ranches completely burned up, unable to support any life, and the complete dispersion of their cow herds—they have a fear that if they go out and pay $2,500 a unit to restock and that drought comes back they’ll lose the entire operation. That fear is weighing heavy on those people who have to make these decisions.”

Ultimately, Mies projected only a modest expansion of the cow herd because of these opposing forces behind the potential. Dr. Darrell Peel of Oklahoma State University agreed that the expansion will be modest, and slow.

“When will it begin? I think it has. I think heifer retention and herd expansion started in the last quarter of 2013,” he said, pointing out the most recent heifers on feed numbers which have been suggestive of heifer retention efforts, much like seen in the past few years.

“We have an incentive to recover what we’ve lost in the last three years,” he said. “I think it’s pretty clear we’re going to try to add something like 1.8 to 1.9 million cows to get us back to where we were then at about 30.8 million head. I think it will probably take at least until January, 2017 for that to happen.”

Peel thought it could happen that fast, and no faster, but also noted that it doesn’t have to go that fast. He added that the industry could see an expansion period for the rest of this decade. Dr. Larry Corah of Certified Angus Beef, had similar numbers in mind, though he couched them in terms of how many cows the industry needs, not how many it will have in the near future.

“I think we need to get back into that range of 30-32 million mother cows. Ideally I’d like to see that above 31 million.”

Expanding demand?

“Expansion is going to cause a decrease in beef supply and it’s going to drive prices upwards,” said Mies bluntly after discussing the potential for herd expansion. More heifers retained to enter the cow herd means fewer cattle going into feed yards and slaughter plants, and that means less beef being produced. Less product means higher prices.

Mies said that the potential for higher prices—above the record retail prices still being set today—represents a serious challenge to the beef industry in the near future.

“Because today we are selling an upper-level Cadillac in a Chevrolet market. If we retain heifers back, there’s every chance we’re going to be selling a Lexus product in a Chevrolet market,” he prophesized.

He emphasized how the potential for increased prices also demands that the product’s quality improve commensurate with the cost; if the industry is demanding Lexus-level prices for a product, it had better perform like Lexus-quality product.

“You can’t have any substitutes at the prices we’re demanding and will demand in the future as we go down the road with record high beef prices for our consumers.”

He told the story of seeing a chuck roast in one of his local stores for $3.28/pound, while next to it a closelytrimmed center cut pork loin was only $2.16/pound.

“That chuck roast had better eat like the best chuck roast you’ve ever eaten in your life or the next trip will see a pork loin going out the door.”

The problem with pork is another thing noted by many speakers. The “problem of pork” is multifaceted, but at the heart of the beef industry’s concern is—or should be—the economy of it.

According to the most recent World Agricultural Supply and Demand Estimates Report, overall beef production is set to eclipse pork production in terms of volume. Beef production for 2014 is projected to be 24.4 billion pounds, compared to pork’s 23.6 billion pounds. Despite that, the cost of production and time involved in production in pork compared to beef is much less/shorter, meaning that the pork industry can respond more rapidly to changes in production-affecting market signals, such as inexpensive corn and other feed grains, as well as offer a less expensive product to the consumer.

“More feed grains will allow for a lower cost of production,” said Mies after discussing the economy of ethanol in the U.S. “Now that’s good news for cattle, but it’s even better news for pork and poultry. And we will compete with them at the retail counter. So lower feed grains, lower costs; great, except it’s going to lower our competitive advantage.”

The issue of demand in the face of high prices being a concern is not a new concept, and one Andrew Gottschalk of Hedgers Edge comments on frequently, saying the demand side of the beef equation is the risk for the future. Of the current product prices, both in the cutout and in the retail case, he had this to say last week:

“The ‘bulls’ are still running and it is best not to get in their way unless one wishes to be gored. That said, the final arbitrator of this situation will be the retailer and more importantly the consumer. As previously stated, the retail beef margin was eliminated when the fed cash price advanced beyond $136 and the cutout advanced beyond $206. The recent advance in cash prices will necessitate a minimum average advance to $5.15 at retail up from the most recent price of $5.01.”

So far the demand side of the beef equation has remained surprisingly resilient in the face of record prices. According to the December Food Demand Survey out of Oklahoma State University (most recent), consumers’ willingness to pay for steak declined 4.32 percent (a roughly 30-cent decline in the price they were willing to pay) between November to December, but increased from $3.97 to $4.20 ( 5.79 percent) for hamburger.

Conversely, willingness to pay for various pork and chicken items decreased significantly among all categories. Hamburger was the only meat among the survey options—steak, hamburger, pork chop, deli ham, chicken breast, chicken wing, rice and beans, and pasta—that saw an increased willingness to spend.

The other measure of demand covered in the survey—consumer expectations—indicated that consumers expect beef prices to continue to rise, but that fewer respondents said they plan to cut back on buying beef compared to pork. All of these are hopeful signals for near-future beef demand.

“Consumers have yet to vote on this issue,” said Gottschalk of current retail beef prices. “They ultimately will determine the magnitude and duration of these gains.” — Kerry Halladay, WLJ Editor

[Editor’s note: The 2014 North American Bull Guide theme this year is “Looking Forward” and includes a number of articles on futurefocused issues, whether in management or technology.

The Bull Guide was included in last week’s issue of WLJ. If you are a subscriber and did not receive your personal copy of the Bull Guide, call Kathy in our Circulation department at 800/850- 2769. If you are not a subscriber but would like a physical copy of your own, one can be mailed to you for a cost. If you simply want to read it, subscriber or not, the digital version of the Bull Guide is available online at wlj.net; click on the Bull Guide button in the middle of the page.]

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