by: Wes Ishmael

There was no question that 2013 was going to start the New Year with a smaller beef cow herd. The question heading into the National Agricultural Statistics Service (NASS) January inventory report (to be released February 1) was just how much smaller.

“As the drought continues, potential for more cow liquidation increases and prospects for herd rebuilding deteriorate,” say analysts in the January Livestock, Dairy and Poultry Outlook released by USDA's Economic Research Service (ERS). “Drought-affected pastures could result in further placements of lightweight feeder cattle in feedlots and further reduce the supply of heavy feeder cattle for placement. Negative packer margins and record high retail beef prices could dampen rising fed cattle prices.”

ERS analysts point out feedlot placement weights continue trending to both the heavier and lighter side.

“The placements of both the lightest and heaviest feeder cattle during the last half of 2012 has led to a distribution of placements of feeder cattle in feedlots of 1,000 head or more that is more heavily weighted at both ends—more bimodal—than is typical,” ERS analysts explain. “The number of feeder cattle on small grains pastures in the Southern Plains States—which will give some indication of the potential for heavy weight feeder cattle placements in March—will be among the information in the NASS Cattle report released February 1.”

ERS analysts say placement of feeder cattle weighing more than 800 lbs. continues to be historically high.

Drought-driven Contraction Accelerates

Pressure on the industry's infrastructure levied by the prolonged drought—the short cattle numbers—became more visible during the fall when Pratt Cattle Feeders, a multi-yard organization headquartered in Kansas closed its yard at Hayes, Kansas.

Impacts of the multi-year dry spell became downright glaring when Cargill announced January 17 that it was closing its packing plant at Plainview, Texas February 1 because of tight cattle supplies.

“The decision to idle our Plainview beef processing plant was a difficult and painful one to make and was made only after we conducted an exhaustive analysis of the regional cattle supply and processing capacity situation in North America,” said John Keating, president of Cargill Beef, based in Wichita, KS. “While idling a major beef plant is unfortunate because of the resulting layoff of good people, which impacts their families and the community of Plainview, we were compelled to make a decision that would reduce the strain created on our beef business by the reduced cattle supply. The U.S. cattle herd is at its lowest level since 1952. Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry. Our preference would have been not to idle a plant.”

Approximately 2,000 people worked at the Plainview facility. According to Cargill, Plainview employees affected by the plant closure would receive support as well as assistance finding and filling open positions at other Cargill locations or with other employers.

The company's remaining beef cattle processing plants in the region, at Friona, Texas; Dodge City, Kansas and Fort Morgan, Colo. will receive cattle that were previously destined for processing at Plainview. The company's regional beef facilities at Fresno, Calif..; Milwaukee, Wis.; and Wyalusing, Penn., as well as its beef plant in Schuyler, Maine, and two beef plants in Canada, are unaffected.

“Given the over-capacity that exists with four major beef plants in the Texas Panhandle and a dwindling supply of cattle in the region, idling Plainview will allow Cargill to operate its other beef plants in Texas, Colorado and Kansas more consistently on a five-day-per-week basis to meet our customers' requirements, while helping us maintain our position in the U.S. beef sector,” explained Keating. “Our long-term commitment to U.S. beef production is unwavering. Over the past 10 years we've invested more than $766 million in our U.S. beef plants to ensure they remain best in class in the industry.”

According to Cargill, plans to idle the Plainview facility include measures for preserving its infrastructure for potential reopening if the U.S. cattle herd rebounds and requires additional processing capacity. However, Cargill does not expect the U.S. cattle herd to significantly increase in size for a number of years.

“We delayed the decision to idle Plainview as long as possible, due in part to our outstanding team and ongoing excellent support from the community. We were also hoping the drought would break, pasturelands would be restored, cattle ranchers would retain heifers and the national herd trend of declining numbers over the past few years would be reversed,” Keating said. “Unfortunately, the drought has not broken, feed costs remain higher than historical averages and the herd continues to shrink. The industry has experienced this cycle in the past, although this one is longer and more severe than most. Nevertheless, we are optimistic about the long-term prospects for U.S. beef demand from American and international consumers, and that the drought in Texas and the Southern Plains will become a memory.”

This contraction in feedlot and packing capacity has long been expected, but the reality is no less harsh when it finally arrives.

Price Upside May be Limited

Futures and auction cattle prices broke hard the middle of January heading into Cargill's announcement; they dropped like a rock immediately afterwards.

Compounding the potential price up-side that should be driven by tighter supplies is that there are more pigs and poultry running around than many figured would be last summer.

“The substantial upward revision in feed use suggests that meat industry contraction has not been as great as was expected in mid-to-late-summer as the magnitude of the drought was still being assessed,” explained John D. Anderson, Deputy Chief Economist at the American Farm Bureau Federation a mid-January In the Cattle Markets. He was speaking to January's World Agriculture Supply and Demand Estimates (WASDE) which surprised many: instead of the 20 million-bushel increase in carryover analysts expected on average, carryover was slashed by 45 million bu.

“These feed numbers correspond to stabilizing, and even increasing, production figures in at least part of the meat sector,” Anderson explained. “In fact, last month's quarterly Hogs and Pigs report showed an essentially stable hog inventory. Likewise, recent broiler hatchery reports have shown increasing egg sets. Last week's hatchery report showed that egg sets have been equal to or higher than year ago levels for each of the past six weeks. Meat production figures in Friday's WASDE report are broadly consistent with these trends, calling for pork and broiler production to be about flat from 2012 to 2013 (a slight increase in pork production, a slight decrease in broiler production).

Conversely, Anderson said, “…beef production is projected to decline sharply from 2012 to 2013. Drought-induced contraction in 2011 and 2012 along with the long biological lags inherent in beef production virtually preclude any other outcome. In fact, declining beef production is probably in the cards in 2014 as well. This means a couple of things. First, beef consumption will decline relative to pork and broiler production. This is a rather obvious mathematical truism: less beef produced means less available to consume. Second, and more interestingly, higher pork and broiler production will limit the upside price potential in the meat sector. With all the talk of tight margins in the meat complex, the move toward steady-to-higher production entails a good bit of risk. This seems especially true for the pork sector, where producers on average still seem to be facing substantial red ink…”

Despite lower beef production, prices will also likely be challenged by the supply/capacity normalization suggested by the Cargill plant closure.

Moreover, LDPO analysts explained, “A number of factors are potentially affecting cattle and beef markets adversely—record-high retail Choice and All-fresh beef prices in November, concerns about consumers' disposable income, prospects for higher pork production, adequate supplies of poultry, and the near-term prospects for continuing negative beef-packer margins.”

December 2012 retail Choice and All-fresh beef prices, at $5.12 and $4.77/lb. were already below November 2012 prices.

“It is difficult to see how fed cattle prices can go much higher except at the expense of a significant reduction in slaughter numbers,” LDPO analysts say.

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