HUNTIN' DAYLIGHT -- DELAYED EXPANSION GROWS INDUSTRY RISK

by: Wes Ishmael

“There is an expectation that feeder cattle prices will continue to ride high the next year or so due to the limited supply of feeder cattle and the relatively cheap feed costs associated with high corn yields,” says Andrew P. Griffith, University of Tennessee agricultural economist, in his weekly market comments.

Griffith made that observation in some of his weekly market comments in October as feeder cattle prices blew past record highs and as calf prices mounted a contra-seasonal price rally.

Even with the steamy demand, by the middle of October buyers were hammering calves with elevated risk.

“While price levels are soaring for green-conditioned yearlings and strings of fancy calves, the other side of the coin is extreme prejudice against small consignments of mixed quality and color (high-risk) un-weaned bawlers that sell far behind the former and for good reason,” explained analysts with the Agricultural Marketing Service (AMS) toward the end of October. “An untrained eye may find it unfair that there's such a disparaging difference in the demand for calves that individually don't appear that much different. But, if these calves were followed to their new home and through the growing stage of their life cycle, that untrained eye would be keen by next fall.”

Risk includes the ability of cattle to make a load and ultimately a cattle feeding pen. There's more transaction cost and time tied up assembling calves a few head at a time, besides the extra handling and co-mingling.

For producers who can't market a load of similar-sort, same-sex calves at one time, the AMS analysts reminded, “Small producers can add value to their calves by pre-conditioning with a full vaccination program and weaning them for at least 45 days. An attempt should also be made to increase the lot size at sale time, either by narrowing their calving window or by taking advantage of available co-mingling programs with other smaller producers.”

Given cattle supplies, there is plenty of reason to expect calf prices to continue climbing for the next couple of years.

In fact, analysts with the Livestock Marketing Information Center (LMIC) expect net returns per cow over cash costs this year to be about $125, compared to $32 last year. Returns are about $125 per cow. That will be the highest since 2005.

“However, there is a major cautionary note,” LMIC analysts say. “Due to drought, many cow-calf operations had to sell off many cows. Even if per cow returns are higher, their enterprise is providing limited net income – because in 2013 they have fewer calves to sell than in prior years.”

What's more, analysts emphasize, while cattle prices are record-high, so are input costs.

Cow costs surged $250 per head during the last five years, according to LMIC, growing to $800 per cow this year. It was $700 last year. LMIC considers 14 major cost categories, everything from purchased protein feed to interest.

“Looking ahead to 2014, there is a bit of good news on the cost front, and cattle prices are forecast to continue to record year-over-year gains,” LMIC analysts say. “Purchased feedstuff costs should drop in 2014. In fact, cash costs of production per cow are projected to decline slightly in 2014. That cost drop plus high cattle prices set the stage for much improved per cow returns in 2014. In fact, those cash returns could substantially exceed 2004's record high.”

Fed Cattle Prices Increase Along With Uncertainty

“The one aspect of the market that could keep feeder cattle prices in check is fed cattle prices,” Griffith said. “For feedlots to be able to justify paying record prices for feeder cattle they will have to receive record prices for fed cattle and that may depend on beef movement domestically and internationally. Feedlots are trying to fill the pens, while packers are trying to maintain throughput capacity, which means what they are willing to pay is related to covering all variable costs and as much of their fixed costs as possible. Currently, these factors bode well for cow-calf producers and stocker producers.”

The third week of October, fed cattle prices blew past the previous record-high, trading for $131-$134/cwt. on a live basis and for mostly $208 in the beef.

But that was just a week. Excess feeding and packing capacity means both sectors chase cattle harder and pay more than they otherwise would, pressuring margins in both sectors. Ultimately, capacity must come in line with the smaller cattle herd.

Echoing Griffith's earlier observation, it seems there are a couple of potential factors that can hold the beef industry in check as global demand for animal proteins grows.

One is the declining cow herd that is fixing to pare capacity from cattle feeding and packing; capacity spawned by significantly more cattle numbers a decade or so ago.

Capacity exiting the business began several years ago when Tyson closed its packing plant at Emporia, Kansas. Cargill closed its Plainview, Texas facility last year.

Feedlots have been exiting the business, too; arguably the smaller, older, less efficient yards. Cargill's recent announcement that it will shutter its feedlot at Lockney, Texas may signal a looming round of more significant feeding capacity liquidation. The Lockney yard has a one-time capacity of 60,000 head or so. It's owned by the same outfit that has one of the nation's largest packing companies.

Tom Brink says lots more is going to have to leave the business in order for it to be balanced with the available supply of cattle.

Brink is a private analyst who recently served as senior vice president and chief risk officer for JBS-Five Rivers Cattle Company. Brink shared some perspective on cattle feeding capacity at the recent 10th Annual Holt Cat Symposium on Excellence in Ranch Management, presented each year by the King Ranch Institute for Ranch Management.

Cattle feeding capacity was in balance with the available supply of feeder cattle in 2000-2001, Brink says. By 2008-2009, excess capacity ballooned to 20 percent. Last year, Brink pegs excess capacity at 22 percent. In other words, there was the capacity to feed 22 percent more cattle than were available. To bring capacity back into balance, Brink says it would require the closure of 600 feedlots that each fed around 10,500 annually. For perspective, he explains there are 2,100 feedlots in the nation with a one-time feeding capacity of 1,000 head or more.

Brink also said he expected at least a couple more packing plants to close next year. He adds that cow plants are especially vulnerable given the dearth of cull cows and the odds that lean trim prices with catapult into the stratosphere in 2014.

Speaking of which, another factor that could keep industry opportunity in check is mainstream players allowing the populist tail to wag the industry dog.

The debacle of mandatory Country of Origin Labeling (COOL) serves as a prime example.

Another packing plant closed in recent weeks, citing the onerous cost of complying with COOL. That's exactly what common sense said would happen ever since the idiotic regulation was hatched.

Mainstream livestock and meat associations filed a lawsuit in July to block implementation of the COOL rule and then a motion for a preliminary injunction a couple of weeks later. The latter was denied by a U.S. District Court in September, which is now being appealed.

All the while, the industry is struggling to find expansion footing, in part due to the uncertainty caused by needless regulations like COOL.

In an October issue of In the Cattle Markets, Glynn Tonsor, a livestock economist at Kansas State University explained that the Economic Policy Uncertainty Index in September was higher than during the Black Monday period of 1987 when global financial markets crashed.

“Appreciating the economic implications of heightened uncertainty has a direct role in understanding current and likely behavior of cattle producers,” Tonsor says, “As uncertainty is elevated, most economists argue larger expected returns are required to effectively trigger major investments such as those required to expand the breeding herd. The personal background of most cow-calf producers coupled with the ever-increasing environment of uncertainty on many economically important points that producers individually have no control of has led to limited moves to date in initiating aggregate herd expansion…

“…When uncertainty on consumer demand strength, tax and regulatory policies, and global macroeconomic conditions are considered, one can gain an even deeper appreciation of how historically high projected returns for cow-calf producers may not be sufficient to trigger herd expansion volumes some industry leaders would like to see, and why simple yes-no answers rarely apply.”







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