HUNTIN' DAYLIGHT - SEEKING BOTTOM

by: Wes Ishmael

“Federally inspected cow slaughter is at its highest level in more than a decade, and this slaughter has been based on the lowest cow inventories since the early 1950s.”

That statement from analysts with the USDA Economic Research Service (ERS), in the November Livestock, Dairy and Poultry Outlook, pretty well sums up current beef cow reality, as well as a potential dilemma.

On the one hand, U.S. beef producers continue churning out all the beef U.S. consumers want. Total beef production has more than doubled since 1956, from 310 lbs. per cow then to 633 lbs. per cow in 2009, according to ERS statistics.

“The numbers tell the tale, which is that America's cattle industry has effectively been turning fewer cattle into more pounds of beef,” says Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

The U.S. beef cow herd has decreased 12 of the last 14 years, dropping from a cyclical peak of 35.3 million head in 1996 to the January 2010 level of 31.3 million head. This represents the smallest beef cow herd since 1963.

Combined with smaller dairy cow numbers, Peel explains the 2010 calf crop is expected to be 35.4 million head, the smallest U.S. calf crop since 1950. Total U.S. cattle inventory has decreased by almost 10 million head since 1996 to the January 2010 level of 93.7 million head, the smallest cattle inventory since 1959.

In contrast, total beef production has not changed accordingly. In fact, 2010 beef production is projected at 25.9 billion lbs., slightly higher than the 1996 level of 25.4 billion lbs.

On the other hand, domestic beef demand was shaky even before the Great Recession. According to the Annual All Fresh Beef Demand Index assembled by Glynn Tonsor at Kansas State University, domestic demand has been down year-to-year since 2004. In 2009 it was at the same level as in 1997. Based on the first three quarters of this year, it will likely be down again.

Beef exports continue to pick up some of the demand slack. In September exports were up 16 percent in volume and 27 percent in value compared to the previous year, according to the U.S. Meat Export Federation. Through the first nine months of the year, beef exports equated to $145.07 per head of fed cattle harvested, $8.60 more than in 2003 prior to the discovery of Bovine Spongiform Encephalopathy (BSE).

“We have maintained production thus far in two primary ways,” Peel says. “First, decreasing inventories allows the industry to utilize that inventory as production while numbers are declining.”

Second, between 1996 and 2006, cheap corn allowed the industry to feed animals to ever-increasing carcass weights and to feed lightweight calves for many days in feedlots. So, the slower rate of turnover helped maintain feedlot inventories.

“In effect, the U.S. cattle industry has been able to effectively turn fewer cattle into more pounds of beef,” Peel says. “However, the situation is now different.”

Sell Now-Grow Later

For one thing, as numbers continue to decline, the strategy across the supply chain has been to sell cattle forward, playing catch-up with lower carcass weights earlier in the year created by the harsh winter. As feedlot performance and subsequent tonnage declined, greener, lighter cattle were marketed earlier, setting the stage for carcass weights to continue lower.

According to the Livestock Marketing Information Center (LMIC), based on USDA data through the week ending November 6, average dressed weights for steers stood at 832 lbs., 15 lbs. less than the same time a year earlier. However, that was still 10 lbs. higher than average for 2004-2008.

“Year-to-year increases in steer dressed weights are forecast to continue for the balance of the year,” say LMIC analysts. “For the fourth quarter, steer dressed weights are forecast to average slightly above last year which will boost U.S. beef production slightly above last year levels in the fourth quarter. However, heavier weights in the fourth quarter will not make up for the notable below-year ago dressed weights earlier in the year, with the annual average dressed weight forecast to be one to two percent lower than 2009's. Looking ahead, average steer dressed weights are expected to trend heavier in 2011.”

Of course, increasing feed costs have played a role, too.

Peel points out expensive corn forces the industry to feed heavy yearlings and move them through the feedlot faster. Faster feedlot turnover exposes the shortage of cattle quickly as feedlots scramble to find sufficient supplies of feeder cattle to place on feed and maintain feedlot inventories.

“Tight inventories of beef cattle have enticed buyers to start purchasing next spring's stockers a full month before we reach winter,” said analysts with the Agricultural Marketing Service in November.

Selling forward is a self-limiting strategy, though, with a finite end. Peel emphasizes the industry has been able to keep the supply line full at the expense of cows and replacement heifers.

“Total cattle slaughter for 2010 is running almost two percent above 2009 levels. Steer slaughter is up less than one percent this year,” he explains. “By contrast, heifer slaughter is up nearly three percent and cow slaughter is up four percent. It is clear that we are maintaining slaughter rates, in the short run, with our females.”

Peel cautions this is not sustainable without accelerating herd liquidation. At some point, the U.S. cattle industry will try to stabilize the herd size and then expand a bit.

As it is, the price slide between weights continues narrow—inverse at times—and marketing patterns will likely shift in atypical ways. According to ERS analysts, “Net placements (feedlot) could drop off significantly beginning sometime early in the fourth quarter, if the following circumstances persist: First, net placements beginning in March 2010 have been larger year-over-year, with July the sole exception. As a result, feeder cattle supplies outside feedlots are lower year-over-year by almost four percent. Second, although there remains some potential for pulling feeder cattle forward for feedlot placement, the relatively high corn prices may temper these placements, especially if fed cattle prices come under pressure from placements over the last several months. Third, the demand for lighter weight wheat-pasture calves will likely provide some support for feeder cattle prices, another negative for net feeder cattle placements in the face of high corn prices if wheat pasture continues to be available for most of the winter.”

Overall, Peel says, “Given the current situation this implies a significant reduction in cattle slaughter in the short-term just to hold the cow herd size steady. It seems likely this process will start in 2011.”

Likewise, the ERS folks explain, “With high corn prices, lower prices for light feeders—especially for calves, which are typically discounted relative to yearlings of the same weight—will not encourage cow-calf producers to expand their herds before sometime in 2011,” say ERS analysts.

When expansion does occur, however flat, supplies will tighten further, of course, in the short to mid-term.

It's the long term that has plenty of folks wondering. Without a significant increase in domestic demand and ongoing increases in export demand, it seems logical that producer attrition will continue as the cow-calf sector becomes more concentrated.

At some point, continued herd contraction must necessarily erode the current industry infrastructure.

At what point does a feedlot close its doors. When does a stocker operator leave the business because there are too few cattle at the weights, quality and price he needs to make a living? The list goes on.

That's not playing chicken little for the sake of discussion. Those are questions some in the industry have been pondering. Those are questions the industry needs to continue puzzling over individually and as an industry.







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