EXPANSION HINGES ON SUSTAINED PROFIT

by: Clifford Mitchell

Courting change always seems to end up with a good debate. Whether it's a singular contemplation or a group deliberation, many factors are often pondered to come up with the answer, much like a school boy, at the first dance, waiting for that special moment.

Finding the right time to take advantage of an opportunity sometimes will also involve moments of self-assurance and cold feet. Cow herd expansion seems like a no-brainer for some with current market projections. Optimists will charge forth, while the other side will waiver.

“There is a clear need to expand the cow herd. The dilemma for most comes down to the immediate value versus her value if you save her and breed her. We're beginning to see some incentive to expand,” says Dr. Derrell Peel, Extension Economist, Oklahoma State University.

“The price of calves for the last six months will at least make producers think about expansion. Even if you save heifers this fall, it's still a long time before you get her in production,” says Steve Swigert, agricultural economic consultant for The Samuel Roberts Noble Foundation, Ardmore, Oklahoma.

Some operations must look at more variables than others to decide. Variable weather patterns in some areas coupled with environmental needs may put a hold on expansion plans.

“Producers in our area really need to evaluate how they are stocked and at what level to re-stock. Having more cows doesn't always mean more profit because hay and supplemental feed are expensive,” says Dr. Jason Cleere, Beef Cattle Specialist, Texas AgriLife Extension.

“I am not sure it's time to expand. High prices don't necessarily mean high profits. High profits trigger expansion and profits aren't high at the ranch level,” says Dr. Harlan Hughes, Professor Emeritus, North Dakota State University.

Extended market forecasts show a supply driven feeder calf market that definitely favors the producer. Cow herd expansion seems to depend on more factors in the 21st Century beef industry.

“There is an awful lot of talk about expansion, but it may be premature. I think cow numbers may stay where they are at for a few years,” Hughes says. “The day-to-day costs of ranching have gone up drastically since 2006. Some parts of the country that depend on fertilizer had to back off because it was too high. Profits on the existing cow herd must get better before we see wide spread expansion.”

“In the last six or seven years cow costs have increased at least $100 per head. Calf prices had to go up,” Cleere says. “Unpredictable weather is delaying the decision for a lot of producers.”

“With the impact of higher feed costs, just because calf prices are high doesn't translate into profitability,” Peel says. “Producers won't think about expansion until they don't feel the need to sell the immediate calf crop. There is a lot of uncertainty with profitability level because of the volatility in input costs.”

“There are a lot of factors today, which may have not been there in the past. Weaned, pre-conditioned calves selling for $700 to $800 per head is definitely new territory,” Swigert says. “It could be time to consider expansion for some, but at the same time calf prices are going up, so are input costs.”

Bragging rights to a good market could excite even unmotivated cattlemen. Prices are hitting new territory, while production costs are also entering a new realm. Expectations for cow herd numbers could be changing.

“We have a new set of rules. Prior to bio fuel, we had pretty predictable cow cycles,” Hughes says. “The bio fuel era has broken the cow cycle. We no longer have cyclical expansion and high corn prices caused huge losses throughout the system.”

“Before producers can expand, we have to look at cost of production and define profitability. Growing calves is the best use of that grass in our area,” Swigert says. “The two biggest things holding back expansion in our area are cow costs and competition from the stocker business.”

“For most, we are definitely operating at a different price structure and it's going to take a certain amount of time for producers to adjust,” Peel says. “The main thing producers need to realize, during the decision making process, they need to stabilize the cow herd and not let cows get old.”

The beef business has one objective, to supply hungry consumers. At what point does lack of supply affect beef demand and when do we go into crisis mode trying to feed a growing population. Slaughter weights continue to rise, but will this be enough without some sort of expansion.

“To this point we have maintained beef production by slaughtering cows and heifers. This is not a long term solution,” Peel says. “Producers have to believe in long term profitability. Continued good calf prices and controlled input costs should maintain that level of profitability.”

“At some point, producers will reach the stage where they make the decision to expand,” Swigert says. “Retained ownership of the calf crop and growing them to a larger weight makes more sense right now. There is an opportunity for expansion with producers not involved in the cow/calf business.”

“Economic forces tell us to take advantage of growing cattle,” Hughes says. “If you are in an area with cheap or excess forages, putting extra weight on calves makes a lot of sense.”

Each operation could answer the expansion question in a different manner and it comes down to timing. Properly stocking ranches through the right economic channels will ultimately tell the story.

“There is expansion opportunity for some outfits that have resources and the ability to control input costs. Obviously, some outfits are better at this than others,” Cleere says. “When you rebuild or expand, it's a long term investment. Make sure she is a good one and matches your environment. Keep cattle efficient and remember to take advantage of crossbreeding.”

“Each producer has to look at the figures. I am sure there are some ranches that are a little different and have the opportunity to expand,” Hughes says. “Be cautious. Make the numbers show profit before you take management action.”

“Make sure cows are the best use for that extra grass and you can control feed costs. Producers don't want to be overstocked,” Swigert says. “Expansion really depends on the efficiency of the operation. If cow costs are low and you market good calves, there is a good opportunity.”

“For most operations it will ultimately be a balancing act between calf price and cost of production,” Peel says. “There is a high current value for the calf crop, but cost management is really important.”

The forces of supply and demand have had an affect on market price throughout the system. Good calf prices seem to translate into higher prices for other classes of cattle. Expansion could hinge on the affordability of replacements.

“We haven't seen even close to the value of breeding animals, once we try to expand. There is going to be a certain amount of sticker shock for most producers buying replacements. This is one of the adjustments cattlemen will have to make,” Peel says. “There is added cost with expansion. The real question will be to raise or buy females and each operation has to figure out what works best. Feed and labor costs will be big factors in this decision. Heifer bulls are another cost for some operations not used to retaining females.”

“There will be some price shock for bred heifers. The challenge for most operations will be what they are willing to pay for replacements. Some won't participate,” Swigert says. “Producers often give up a calf when they retain replacements. Selling feeder heifers and replacing them with bred females, for the right price and getting a calf a year earlier, makes a lot of sense.”

“If the weather cooperates, replacements could get fairly high and I look for the price of good breeding stock to keep going up,” Cleere says. “At the same time, the price for cull cows has gone up and producers have a lot of trade-in value to offset cost.”

As the market trends upward for females, the cautious approach may be the best case scenario for some operators. Simply adding numbers with high production costs may not be the most efficient answer.

“I can't make the current bred female market pay. Be real cautious expanding with what I call expensive bred cows and heifers,” Hughes says. “New cows have to pay their own way. You can't subsidize them with the existing herd. Subsidizing makes no economic significance.”

The signals for expansion seem to be loud and clear on one hand. On the other there is some apprehension. Will other factors like energy crop and grain production keep expansion at bay? Has the beef industry seen the last of its glory days from a pure numbers standpoint? Cow numbers depend on the availability of grass, which for some operations seems to be more challenging to secure.

“I don't think we're going to have the type of cow numbers we have had in the past. When inputs double there probably should be less production,” Hughes says. “A lot of pasture has been converted to corn production and it's not going back. We may not have enough capacity to reach those numbers. Low cow numbers may return our industry to long term profitability.”

No doubt in the beef business, some success stories have been created with a well calculated gamble. The market usually will dictate management decisions throughout the cow/calf sector. In some cases, more numbers may be needed to offset costs. Some operators are well positioned to take on extra risk and these outfits could set the tone for expansion in the near future.

“Cow/calf producers have been a little more cautious in our area. We get dry spells and those spells are very expensive to get through,” Cleere says. “The level of expansion will depend somewhat on the economy. There is an opportunity for expansion, but right now most seem timid.”

“The better managed operations are separating themselves. Operations that can market additional calves have a good opportunity to expand. Cattlemen can control costs and genetics,” Swigert says. “If prices continue at this level profitability will change, which will change the best use of grass. Operators have to make the decision whether they are going to be in the cow business, run stockers or market replacements.”

“Cattlemen have to really evaluate cost management and determine the amount of risk they can take. Expansion is risky because of the length of time it takes to change,” Peel says. “Certain operations are positioned for expansion. If this is the case, it's time to be a little more aggressive.”







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