HUNTIN' DAYLIGHT -- STRUCTURE DRIVES INFRASTRUCTURE

by: Wes Ishmael

“…this is the third year of the downturn in the cattle cycle and there are currently no significant signs of herd expansion. Inventory of both cows and replacement heifers have been reduced in 2010 and placements of heifers in feedlots remain heavy. Growing imports of feeder cattle from Mexico have somewhat supplemented the feeder cattle supply, but with much stronger feedlot placements during 2010, supplies of feeder cattle remain extremely tight. Also considering the fact that cow slaughter remains strong, these factors appear likely to limit the ability for herd expansion in the foreseeable future.”

That comes from the recent Overview of the United States Cattle Industry from USDA's National Agricultural Research Service (NASS).

Keep in mind, the “third year of the downturn,” is somewhat misleading. Though there was a slight upturn in numbers for a couple of years, for all practical purposes, the nation's cow herd has declined for better than a decade. According to the NASS report, the beef cow herd declined 1.33 million head from January, 1 2006 to January 1 2010 after gaining a paltry 171,000 head during the prior two years of expansion. USDA will publish January 1, 2011 cattle inventory numbers January 28.

NASS analysts also point to quarterly Cattle on Feed reports, which show that placement of heifers remains high. For 2010 they say heifers represent 37.5 percent of cattle placed on feed, up slightly from the prior year. Compare that to a heifer placement rate of 34.7 percent when the herd was expanding in 2005.

     

Numbers drive Structure

At the risk of sounding like the proverbial busted record in this and recent columns, this extended downturn in numbers echoes of permanent industry change.

During the last decade or so, when the subject of the cattle cycle was raised, folks usually chose sides between the notion that the cycle was fading into history or that it was evolving from a cycle based on cow numbers to one based on beef production. But, the length and depth of herd liquidation now forces consideration that neither may be true. Instead, in the absence of strong domestic consumer demand growth, the market could be leading the national cow inventory to a lower plateau where numbers tread water rather than decline further or expand.

“The structure of the United States cattle industry continues to change, with a greater proportion of cattle being raised on fewer and larger farms. The total number of cattle operations (all cattle) in the United States was 950,000 for 2009, down one percent from 2008. Beef cow operations in 2009, at 753,000 were also down one percent from 2008. During the last 20 years, the number of all cattle operations in the United States has fallen 28 percent, while beef cow operations have declined by 21 percent,” say NASS analysts. “Over this time, the average number of cattle per operation has increased by 36 percent to nearly 100 head on total cattle operations. In 2009, operations with 500 or more head accounted for 47.7 percent of the total cattle inventory, compared with only 38 percent in 1999. Although less pronounced, the percent of inventory on beef cow operations with 500 or more head has increased from 14.4 percent in 1999 to 16.6 percent in 2009.”

Obviously, this isn't all market-forced attrition, consolidation and concentration. About anywhere corn, wheat and soybeans can be grown, pasture has gone by the wayside. In other parts of the country, some producers are placing more emphasis on non-agricultural uses of their land. Some producers nearing retirement age are taking advantage of historically higher prices to exit the business.

None of this is new, nor is the collective observation that the beef cattle industry is shrinking and will be smaller than it has been in our lifetimes. What is relatively new is the necessary discussion about what that means exactly.

Structure determines Infrastructure

As Darrell Mark, agricultural economist at the University of Nebraska, says in the January 3, In the Cattle Markets, “For 12 of the last 14 years, cattle numbers have decreased year over year, culminating in the smallest national herd in the past 60 years. While that hasn't resulted in a significant decline in commercial beef production due to higher carcass weights and adoption of other technologies, this trend will have a profound long-run impact the structure of the cattle industry itself. Market structure refers to the size, location, and number of firms in the industry. Corn prices and ethanol co-products have resulted in cattle on feed numbers shifting to the Northern Plains in recent years, and drought is currently removing cows from the southeast and southern parts of the U.S. Economies of scale have also dictated that firms grow bigger to keep unit costs of production as low as possible.”

Mark goes on to explain, “While these types of structural changes are also influenced by the size of the national herd, the dwindling supply of cattle will likely have its biggest structural impact on the number of firms. With historically small cattle numbers, fewer cattle producers and fewer beef processors are needed in the industry. Cattle feeders and beef processors have gradually been operating at lower levels of capacity over the last few years, and will continue to operate less efficiently in 2011 relative to their designed capacities. For example, in 2010, fed steer and heifer slaughter accounted for only 75 percent of the maximum feeding capacity of feed yards with more than 1,000 head capacities (assuming an average turnover of 2.1). Similar data would suggest that beef packers weren't operating at much higher levels in 2010. The likelihood of having fewer cow-calf producers, cattle feeders, and beef packing plants continues to grow as cattle numbers are set to decline for at least the next couple of years.”

Though it's true feeding and packing capacity don't magically disappear—the physical structures remain—the longer they remain out of production, the less likely they are to re-enter production over time. Even though, fewer cattle feeding pens have been shuttered to this point than logic would have suggested, this attrition will likely accelerate. Likewise, it's likely than beef packing capacity will be reduced sooner than later.

All of that is before considering the fact that U.S. consumers are just now beginning to see higher cattle input costs passed along to them.

“…If corn prices hold at around $6 per bushel (some are thinking even higher money to ration demand and “buy” more acres this spring), then cattle (fed cattle) prices need to fetch about $130/cwt. to come back anywhere close to the five year average ratio levels (cattle to corn). Much higher cattle prices (or sharply lower corn prices) will be needed to return to the longer run levels of the past two decades,” say Steve Meyer and Len Steiner in their January 5 CME Group Daily Livestock Report. “In the short term, the input price shock has boosted beef supplies as cow-calf operators have liquidated the beef cow herd and limited heifer retention. Indeed, if corn prices continue to climb, we may see further liquidation even at current live cattle and feeder cattle prices. However, in the long term the livestock industry will need to adjust to the new level in feed prices, and for that to happen, cattle prices will have to be at significantly higher levels. This is not good news for U.S. retailers and foodservice operators, who may see some of their margins shrink as they try to pass on the higher costs. And unless U.S. consumers are willing to change their food consumption habits and standard of living, this also implies that meat purchases will take a larger portion of the take home pay in the coming years...”

That's why some folks are already contracting feeder cattle for delivery next fall.

That's why everyone in the business needs to run the pencil sharper, more often, and with a view beyond the current calf crop.







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