Cattle Industry Remains Optimistic
I am sure by now you all have heard the latest cattle numbers released by the USDA. If not, the short version is cattle numbers are down again but not by as much as was expected. Also, heifer retention is up but not by as much as expected.
Here are a few of the numbers that haven’t gotten quite as much press. There are currently only 12.7 million cattle on feed, the lowest number to start a year since 1995, which had 12.4 million cattle on feed on Jan. 1. However, in 1995 there were over 35 million calves outside of feedlots, while the current supply of calves is less than 27 million – almost 25 percent less than the last time our feedlots were as empty as they are now.
This, of course, has serious implications for feeders and packers and is, in part, why we have seen two major processing plants close their doors in the last year or so. There may be some long-term issues if we don’t see expansion happen soon.
The major take home point from the USDA report is that we are poised for expansion but have not really begun that process yet. However, expansion may take a while, as we have all seen the recent costs of retaining heifers rise as we compare the long-term benefits of keeping them versus the instant benefits of selling at elevated prices.
Mother Nature will also play a role in how expansion takes place. While many locations are beginning to improve in terms of moisture, I am not confident that we have yet reached a state where we are producing adequate grass for full herd expansion nationally.
And finally, the fact that we are starting from such a small inventory means there are fewer heifers to retain, so getting ramped up again may take longer than usual. All of these seem to indicate that even if expansion begins in earnest, we are at least two years away, and likely longer, from seeing any major changes to the current supply restrictions occurring in the livestock industry.
A good sign for the industry is that exports remain strong, with almost $5.5 billion in beef exports last year. Beef exports were up 5.3 percent in 2013 as compared to 2012.
The latest World Ag Supply and Demand Estimates (WASDE), suggests that exports may drop slightly for 2014 but not enough to offset the expected decrease in production. The WASDE report suggests that U.S. per capita beef supply will drop by about five percent in 2014.
The same report suggests that total meat production per capita will drop by less than one percent as pork, and poultry should see a large enough increase in production this year to nearly offset decreased beef production.
The decrease in beef production sets the table for continued strong prices for all stages of the cattle industry. However, the industry does need to be wary that direct competitors will see increased supply and will be looking to take some customers away.
Beef demand has shown continued strength in the face of record retail prices, but we are beginning to see consumers shift to lower quality cuts and ground beef as they spend less on high quality, high dollar cuts. If retail prices increase much more, we may begin to see customers substitute towards cheaper options, such as chicken breast and pork chops, much better suited for competition against ground beef than a good rib eye.
I do not think it is a foregone conclusion that we will lose customers, but any drastic increase in prices will likely have a long-term detrimental impact on beef demand if the price of substitutes decline.
Beyond a good grass crop this summer, we really want to see favorable corn conditions this year. If we see seven dollar corn again, we will likely see retail prices increase even more to cover the increased costs of finishing cattle.
Secondly, we will also likely see softer cattle prices, as feeders will try to protect their margins. While the outlook for this year is good, I highly recommend saving some of this year’s profits as there is no guarantee we will continue to see strong cattle prices into the coming years.
There are, as always, a lot of potential negative impacts, including disease outbreaks and export restrictions, among others, lurking ahead.
Moderation is key, both in terms of prices in the industry – we don’t want to see our product get priced out of the market – and in terms of personal expenditures. Remember these are the good times, but they will not last forever.
As you are all aware, unfortunately we are never that far away from the next drought or major winter storm. Now would be a good time to replenish the rainy day fund that has likely been depleted over the last few years.