by: Wes Ishmael

Some cow-calf producers are facing a planning challenge they've never faced before: what to do with significantly more net return than the wildest imagination could have conceived.

In fact, the Livestock Marketing Information Center (LMIC) estimated in July that cow-calf returns this year will be a record-high $445/head. They believe returns next year could be well over $400. You'll note that's significantly higher than their previous projection noted in the last Huntin' Daylight.

Since the early 1970's the Livestock Marketing Information Center (LMIC) has estimated cow-calf returns over cash costs plus pasture rent based on typical production and marketing practices in the Southern Plains but does not include other economic costs like family labor and management.

The reason for the historic largesse is what LMIC terms a near perfect set of demand and supply circumstances, which are yielding record prices. They note Federally Inspected cattle slaughtered is 93.9 percent of 2013's year-to-date. The Choice retail beef price was up 12.6 percent in June compared to a year ago.

“The beef cow enterprise in 2014 and probably for several more years will provide a true economic profit. Plan now to take full advantage,” advise LMIC analysts. “For cow-calf producers, cash flow planning sooner rather than later is critical.”

First, they suggest estimating income for this year using realistic prices.

“Calves this fall could easily be 25 percent over 2013's and cull cows up fully 10 percent,” LMIC analysts say. “Then use cash flow planning on head to be sold, along with a tax advisor, to look at income tax implications and alternatives. Many options exist, and are all very situational-dependent. Some examples of these options are: invest in or expand the ranch, pay off debt, invest in an Individual Retirement Account (IRA), restock cattle herds, build or supplement a savings account for the younger generation's college fund, implement pasture or water improvement programs, transition to an improved or new marketing option such as preconditioning calves, or delay cull cow sales until 2015.”

For others still mired in drought or just now able to take a tentative peek from the foxhole, the challenge is obviously quite different, figuring out whether to build back or how to hold on.

Come to think of it, even folks who aren't drought-pressed may be considering the former.

“The record high feeder cattle prices that will eventually stimulate herd expansion may, in the short run, increase the temptation to sell heifers rather than retain them for breeding,” explained Derrell Peel, Extension livestock marketing specialist in July. “This is particularly true for producers still recovering financially from drought and other economic difficulties. For some older producers who are considering retirement, current market prices may provide the incentive to sell out and exit the industry. While new producers will, in most cases, replace the older producers, there may be a lag in herd growth during the transition.”

Maybe Cowherd Liquidation Stops This Year

USDA's semiannual Cattle report released in July hints at this conundrum and underscores how slow expansion is currently and how long it will take.

According to the report, “The 2014 calf crop is expected to be 33.6 million head, down one percent from 2013 and down two percent from 2012. Calves born during the first half of the year are estimated at 24.3 million, down two percent from 2013 and down three percent from 2012.

LMIC pegs the one-year decline in the total number of cattle and calves at 1.3 percent. USDA estimated 2.9 percent less from two years earlier—there was no semi-annual report last year for comparison.

“As of January 1 of this year, USDA reported that the number of heifers being retained for beef herd replacements was above a year ago and to-date data on heifer slaughter, etc., suggest that that planned heifer retention could have increased since then,” LMIC analysts say. “But, the latest USDA report said all heifer sub categories weighing over 500 lbs. (beef cow replacements, dairy cow replacements, and other heifers) were down from two years ago and from estimates for 2013. Several important relationships regarding heifers in the mid-year report were confusing. Heifer numbers were apparently impacted more than other categories by the survey hiatus in 2013. Those are critical numbers that will await clarification.”

According to Peel, the ratio of the July 1 beef replacement heifers to the January inventory of replacement heifers is the least since July estimates began in 1973.

“This ratio typically rises during herd expansion and decreases during liquidations,” Peel explains. “This indication of additional herd liquidation is somewhat in contrast to the heifers on feed in the July Cattle on Feed report which is down 4.6 percent from year-earlier levels. The year-over-year decrease in July 1 heifers on feed is consistent with modest levels of initial herd expansion. Quarterly estimates of heifers on feed have posted year-over-year decreases for the past eight quarters with an average decrease of 6.8 percent.”

All told, LMIC analysts explain, “Nationally, all signs point to this summer being the transition point to U.S. beef cowherd stabilization and pouring the foundation for growth in cattle numbers. However, the recently released USDA-NASS survey-based national data were not clear-cut.”

Beef Demand Will Decide Ultimate Price Height

Even with the promise of record and near-record cow-calf returns for the next year or so, or because of them, expansion decisions are perhaps more challenging than ever. One reason, of course, are sky-high replacement costs.

“The record high prices that cattle sellers currently enjoy also imply high prices for breeding females that may be a deterrent to expansion, at least initially, for some producers,” Peel says. “Regional factors may be moderating herd expansion as well. Much of the eastern half of the country has lost pasture and hay acreage as crop production has expanded in recent years and less herd rebuilding is expected in this area. In much of the Plains and Western regions, where proportionately more herd expansion is likely eventually, drought conditions persist in some areas and herd rebuilding may be moderated for several months to several years to allow recovery of pasture and range.”

In the meantime, limited cattle supplies in tandem with what appear to be continued lower feed costs suggest that as long as consumers stay hooked, cattle prices have little downside potential for a good while.

On the demand front, Glynn Tonsor, agricultural economist at Kansas State University pointed out in the quarterly Beef-Cattle Economics Webinar that the year-to-year second-quarter Beef Demand Index for all-fresh beef increased by 6.2 percent. That's the biggest bounce since 2004. While per capita consumption—a reflection of supply—declined 2.8 percent in the second quarter, Tonsor explains the average all-fresh beef price increased 10.2 percent.

“Normal seasonality of prices would imply that calf prices will decrease roughly seven percent between summer highs and October/November weaning. However, tight cattle supplies trumped seasonal price patterns this year with price increases that have been stronger than seasonal in the first half of the year and may limit seasonal price pressure on calves this fall,” Peel explained the first week of August. “The value of extra calf weight should remain strong through the fall.”

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