HUNTIN' DAYLIGHT -- ATYPICAL FORCES DRIVE PENDING EXPANSION

by: Wes Ishmael

Mom Nature and economics appear to finally be offering cow-calf producers incentive and opportunity to expand. Exactly who expands and why may be different from the past, though.

"Underlying this optimism is a growing view that many cow-calf operators are nearing a situation of being not only able to physically add breeding stock but also that operators have forward-looking profit expectations that warrant expansion," says Glynn Tonsor, agricultural economist at Kansa State University in a September In the Cattle Markets.

More specifically, Derrell Peel, extension livestock marketing specialist at Oklahoma State University says, “As long as drought conditions continue to moderate the situation, beef cow herd growth of two percent is possible in 2014 with an additional two to three percent in 2015."

A moderating drought is obviously no guarantee given the return of sweltering temperatures and arid conditions that returned to parts of the Central and Northern Plains in August.

"... August 2013 monthly commercial cow slaughter will likely show a sharp decline from the August 2012 level,'" analysts with USDA's Economic Research Service (ERS) say in the September Livestock Dairy and Poultry Outlook. "Thus far, the decline appears sharper for beef cows than dairy cows. However, if the 'flash drought' in the Central United States persists, it could result in more cows going to slaughter and could temper any expansionary plans to retain beef cows or replacement heifers through the winter, as well as slowing or even reversing the decline in cow slaughter."

Going Back the Way We Came

Whenever expansion begins, no matter how likely short and shallow, Peel expects it to be different than seen during typical cattle cycles because the liquidation leading up to it has been so varied from what's considered normal.

Historically, Peel explains cattle cycles have been largely self-regulating cycles of inventory driven by internal factors such as calf price levels, beef cattle biology and the availability and quality of forage resources. However, the liquidation that started in 2001 has been driven by external factors, including input market shocks that reduced cow-calf profitability, a national and global recession that tempered cattle prices and severe drought in important cattle-producing states.

In situations where drought has forced inventory adjustments that are counter to what producers want to do, the details of how the adjustments happen become vitally important, Peel stresses. In short, how the industry got to where it is will have a significant effect on how beef herd expansion will take place in the future.

Since 2007, the calculated number of heifers entering the cowherd remain above average, even while the high rate of cow culling has resulted in net liquidation and reduction in the cow herd inventory.

“In a more typical cattle cycle, the rate of heifer placement decreases at the same time as increased cow culling, with both contributing to herd liquidation,” Peel says.

That's what happened during inventory reduction in 1996-2001. In contrast, heifer placement typically increases simultaneously with decreased cow culling during herd expansion, as was the case from 1991-1995.

“In recent years, producers have continued to invest in replacement heifers despite the necessity of reducing herd size because of external factors,” Peel says. “That the industry has simultaneously increased cow culling and heifer placements in recent years means the beef cow herd is not only the smallest in 60 years but likely one of the youngest and most productive ever.”

More Than Typical Risks Influence Expansion Decisions Too

At the same time, Tonsor says, "It is important to pause and discuss why some cow-calf producers may not initiate herd rebuilding or expansion. Ultimately, each individual producer weighs opportunities for adjusting their operation against the expected economic returns associated with pursuing each opportunity. These opportunities are operation-specific as the practical feasibility of expanding varies. Similarly, producers are mixed in their level of optimism regarding future economic returns of their cow-calf enterprise. A point that often gets missed in these discussions is that not only does 'expected profit per cow' have a role in producer decisions, but importantly, so do variability of profits over time and uncertainty on what profits in the future may be."

With so many more variables outside the cattle business and beef industry having more impact on their fortunes, Tonsor explains, "If one considers most producers as being adverse to risk and uncertainty, for a given level of expected profit, economists anticipate fewer investments to be made in settings viewed as more variable."

Tonsor points to consumer acceptance of technology as one of the variables that compounds uncertainty.

"Irradiation was shown several years ago to be highly effective, from a bench science perspective, at improving meat food safety, yet the public as a whole has been very resistant to industry implementation of irradiation," Tonsor says. He adds that it is critical to understand sound science is not enough to drive implementation of new technologies. He refers to a recent tweet sent to the The Center for Food Integrity: “Science tells us if we can do something. Society tells us if we should do it.”

"Ultimately, the entire meat supply chain adjusts over time, reflective of changes in the state of technical feasibility, along with acceptance of potential practices by consumers, within-industry customers, and international trade partners," Tonsor says. "These ongoing adjustments are important to understand regardless of where in the supply chain a given operation exists. Operations less comfortable with this environment are likely not the entities who will be making capital investments or expanding their businesses. Conversely, those who are at least, relatively speaking, more comfortable with this important feasibility-acceptance distinction will increasingly comprise the operations and hence mindset of the meat industry going forward."

Beef and Cattle Supplies Will Tighten Further

Even if recent declines in beef cow slaughter don't signify expansion, feeder supplies will continue tighter. There were fewer cows in the inventory to start the year, of course. But, Mexican feeder cattle imports, long a dependable staple in the Southern Plains are dramatically lower, too, fueled by drought and cow liquidation in that country.

Moreover, ERS analysts explain reduced numbers of cows in the slaughter mix are helping to keep tonnage up, adding price pressure to fed cattle and wholesale values.

"Fewer cows in the slaughter mix—especially beef cows—could result in heavier average dressed weights of all cattle through the end of 2013, ERS analysts say. "Large inventories of market-ready fed cattle could put negative pressure on fed-cattle and beef prices through the end of 2013. However, retail beef prices could remain in record or near-record territory."

At the same time, consumers will likely continue feeling beef price pressure, further squeezing overall demand. Retail beef prices set successive record-highs in July and August. Choice retail beef prices were $5.39/lb. in August and All-fresh beef was $4.97.

"Although beef prices are lending some support to pork and poultry prices, pork and poultry are in such abundant supply that they are likely to dampen continued upward movement in beef prices, especially with the seasonal decline in summer grilling demand, ERS analysts say. "Despite the price-dampening pressure from competing meats, generally declining year-over-year beef supplies will result in retail beef prices that are likely to remain near current levels for some time."







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