Extension Education: Interesting Time Ahead
First of all, I want to wish everyone a happy New Year. It appears as though 2013 will be an interesting year to be in the cattle business. As I’m sure everyone knows, the tight cattle supply will continue to dominate the industry. The herd shrunk again in 2012, current forecasts are for a four to five percent reduction again in 2013, and most forecasts for 2014 call for decreased supply unless we see some major drought recoveries across the nation. The decreased supply should lead to more record prices this coming year. For those of you with cattle left, this year could be a very good year. However, I would also caution that you don’t want to do long-term damage to your range just to chase these prices. Wise producers will balance long-term production potential against profits over the next year or two. The next couple of years may be very promising for those producers that are paying attention and willing to adapt to changing market forces.
One thing to be wary of in regards to high prices is the carry over of these livestock prices to the retail market in terms of costs to consumers. We don’t want to price ourselves out of the market place, especially as pork and broiler production is expected to remain stable this year. We have already seen U.S. consumers substituting more ground beef in place of some of the more expensive cuts. Unless the domestic and global economies improve, this trend is likely to continue as retail prices rise. However, increased demand for ground beef should help maintain strong cull prices, which should be good news for those of you wondering when rain will fall again.
Speaking of rain, the most recent long-term forecast calls for continued drought conditions through March, well into the growing season for a lot of our state. As we get closer to our growing season, it would be wise to keep an eye on the long-term precipitation prospects. The National Oceanic and Atmospheric Administration (NOAA) publishes a 90-day precipitation outlook twice a month at cpc.ncep.noaa.gov/products/expert_assessment/seasonal_drought.html. Or, you can just search for “Seasonal Drought Outlook” for the most recent forecast. If we are not fortunate enough to get much rain again this year, take advantage of the tax deferment associated with drought designation status. Your accountant can inform you as to all of the benefits, but given the forecast for high cull prices, this would be a good year to be forced to cull a little deeper.
In that regard, now would be a good time to do a little herd management. If forced to reduce stocking, I would only keep younger cows. I’m not convinced that feeding an older cow will pay off if we continue to have elevated hay prices. December hay stocks are at their lowest levels in over 50 years. Some estimates figure a cow will take three years to cover the added expense of last year’s hay bill alone. If we face a similar year, your cows may owe you six calves just to pay her hay bill for two years. It may make some sense to sell more cows, and keep more heifers back this year.
Another uncertainty facing our industry is the ongoing congressional battles over the fiscal cliff, and now the associated debt ceiling. While all the details are still trickling out over the recent fiscal cliff aversion, it appears as though capital gains taxes did not rise as drastically as some people predicted, making it more attractive to cull deeper now, rather than when and if taxes do go up. There are no guarantees, however, that these rates will stay low. The most recent bill was just a temporary stopgap measure, and coming legislation may be entirely different. Make sure you keep abreast of what Congress does, as it should have some major impacts on your decisions this year.
Corn progress should also be on your radar. I expect a lot of corn to go into the ground this spring. As was the case last year, harvests are expected to be very high across the country. If we do see a good crop year, decreased corn prices should help support strong cattle prices. However, if we see less than expected production again in 2013, elevated grain prices will put more downward pressure on livestock prices. Therefore, it may make some sense to test your marketing skills this year. If early crop forecasts are good, corn futures should go down, which usually has a positive effect on cattle prices. Therefore, early in the season you may want to lock in some prices via forward contracts. I wouldn’t lock in price for all your cattle, but try “the rule of thirds.” Lock in a third of your numbers early, and then if prices remain strong in late summer, lock in another third. That leaves you a third available for the fall cash market. This approach allows you to lock up some guaranteed prices, while reducing some market risk, but also doesn’t eliminate you from the expected record prices if a bumper corn crop is realized.
Finally, expect the unexpected. Whether it’s weather, federal policy, economic hiccups or changes in export markets, something is likely to cause some problems in the coming year. However, those producers that are aware of the changing environment and have some contingency plans in place, should be able to make opportunities out of most situations. The best thing you can do is to be flexible. I would argue above all you need to take care of your most important resource, your forage. While I expect great prices this year, the long-term cost of rangeland degradation is not worth a year or two of high profits.
And finally, remember to complete your Census of Ag Survey. There will likely be some important changes to agriculture since the last survey of 2007, and this data is important in that it guides both ag research and policies at the state and federal level. This is critically important as federal budget cuts likely mean less money dedicated to collecting agricultural information in the future.
John Ritten is the UW Extension Economist and can be reached at email@example.com.