Cattle profit: Expertise shared for achieving profitable outcomes in cattle business
In early July, University of Nebraska-Lincoln (UNL) Extension specialists and educators conducted workshops for farmers and ranchers to achieve more profitable outcomes. UNL Agricultural Business Professors Jay Parsons and Elliot Dennis, as well as Extension Educators Jim Jansen and Randy Saner spoke on several economic topics relating to the cattle industry.
The primary topic of concern remains making a profit in the cattle industry, despite recent dramatic changes.
UNL Assistant Professor Elliot Dennis discussed cattle market conditions, noting, “There are three primary drivers that are really moving prices as we see them – those three drivers are demand, cattle inventories and feed conditions. We are at historic levels of beef demand, both in retail and in exports.”
Dennis continued, “Sometimes we have heard the per capita consumption is increasing so demand is increasing.” However, he said this is “fundamentally incorrect.”
“In the U.S., we have a very fortunate situation,” he explained. “We have really steady domestic beef consumption, and consumers generally spend three to 3.5 percent of their income on beef. When we talk about demand, we are considering the price and quantity.”
During COVID-19, the restriction on dining out caused roughly a 50 percent reduction on restaurant demand. This caused a spike in the demand for retail beef.
Still, Dennis shared, “2020 was one of our strongest years. What we’ve noticed from consumer shopping behaviors after COVID-19 is consumers actually continue to maintain their same level of beef consumption.”
Increase in exports
The changes in demand can also be credited to beef exports, especially given the 2020 China Phase One and Phase Two Agreements.
Additionally, Dennis shared, “We’ve increased 125 percent in export demand since 2010.”
Dennis noted the increase in exports is made possible because of two primary reasons, saying, “I think we have done a good job of selling grain-finished beef to our customers. The second is just telling your story.”
The United States exports the largest amounts of beef to Japan, Canada, Mexico and South Korea.
“We are seeing historic levels of beef exports to mainland China,” Dennis explained. “One of the things that increases demand is increasing consumers.”
“The cattle market is driven by cycles,” Dennis continued. “We see cattle inventories increase, and producers are responding to pricing incentives and are seeing opportunities for profit.”
Eventually, prices become depressed because there are too many feeder cattle on the market. Dennis said the lower prices and increased cattle inventory “leads to feeder cattle liquidation and cowherd liquidation.”
“As cowherd liquidation works its way through the market over several years, we basically have contraction,” said Dennis. “In 2019, we reached peak inventory, and since 2019, we have slowly contracted our beef cowherd.”
He continued, “We are up quite sizeably this year in beef cows slaughtered.”
With contracting cowherds, producers can expect to see a depressed calf crop going through 2021. This contraction significantly affects prices.
Dennis explained, “Right now, we are at the bottom of the prices.” With more cows in feedlots, prices are reflecting the increase. Dennis added, “Right now, our pens are full.”
Ag economists around the U.S. get together quarterly to forecast what the prices are going to do, according to Dennis.
Optimistially, he explained, “This quarter, we are thinking the prices will be in the 165 to 170 range, and next year, because of the decreased inventories, the fall could see 170 to 177 range per hundredweight.”
Producers in the Wyoming and Nebraska areas are seeing unfavorable feed conditions and might be rightfully concerned with how this affects their cattle operation.
“A lot of us are concerned about the drought and how this is going to impact both cow slaughter and feeder calves coming into markets,” said Dennis.
He explained, “Drought is really driving pasture conditions, and as pasture conditions worsen, it creates a push on feeder cattle.”
Producers are faced with difficult decisions in the midst of lower quality and quantity of feed available. In the area, we are experiencing around 20 percent lower conditions, meaning there is likely less hay produced in 2021 and hay prices may be elevated.
“The question becomes, ‘Should I buy the hay to try to put on the pounds, or should I ship them to the feedlot and they can put on weight through corn?’” said Dennis. “Who can put on weight more effectively?”
“Feeder cattle prices in Nebraska are starting to drop,” added Dennis. “If we start to see large liquidations, this could be a problem for us and put a lot of pressure on prices, particularly if we start to see herd liquidation in Montana, Wyoming or Idaho.”
With skyrocketing hay prices and a hay shortage, Dennis noted cattle producers have a big decision to make.
“The choice becomes what producers expect the drought to be,” he said.
Dennis offered, “If producers think the drought is only going be two years and this is the last year, then buying additional hay is the correct decision. If producers think the drought is going to last through next year, then partially liquidating the feed cowherd is likely the profit maximizing decision.”
Grazing land leases
When it comes to price risk management, UNL Ag Economist Jim Jansen educated on the possibilities in leasing, noting, “In Nebraska, there are 45 million acres. About half the state is grazing or hay land.”
“The value of land is dependent on what producers can legally use it for and the current interest rate,” continued Jansen. “It is critical when looking at the value of land to consider the trends over several years.”
Western Nebraska is seeing an increase in average rental rate per acre, according to Jansen.
“An increase of 10 percent is a sizeable increase,” said Jansen. “The market value is different from the assessed value. The assessed value is used by looking at the average of the last three years.”
Fluctuation in land values can put stress on producers and landowners alike. With the increasing cost of land in western Nebraska and several parts of Wyoming, one might consider a greater business opportunity when utilizing land for production.
Jansen asks the question, “What would your landlord be willing to accept for cash rent in place of the crop share?”
Whether producers are putting up hay or raising cattle, alternatives to cash rent for leasing ground might allow both the leaser and landowner more flexibility.
Jansen said, “The first step is looking at what the cash rent price would be.”
From there, producers can decide what they are going to flex that lease off of. Jansen mentions the determining factor could be average daily gain, cattle marketing price or even forage height in tonnage. The producer would need to find some historical data to base the prices.
The next step would be establishing the rental rate range. By selecting a maximum, base and minimum rent payment associated with production levels, adjustments can be made accordingly.
If considering a flexible lease, producers need to communicate the guidelines of the agreement with the landowner and negotiate terms and payment dates in writing.
Chaney Peterson is a corresponding writer for the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.