HUNTIN' DAYLIGHT -- MARGINAL DECISIONS

by: Wes Ishmael

Tight supplies and improving beef demand continue fueling record cattle and beef prices. Just when it seems there is little steam left, prices ratchet higher yet. Plus, barring some cataclysmic shock from outside the industry, there's little reason for prices to move lower in the short term.

With that said, prices will peak at some point, and there's reason to believe that point is closer rather than further away.

“The long-term profit outlook for the beef industry is bright, but the record prices on this cycle may well occur in the next six months,” says Chris Hurt, Extension agricultural economist at Purdue University in November market comments.

Hurt bases that prediction on the industry's current position within the historic cattle cycle—the typical 10-12 year cycle during which beef production and cattle prices ebb and flow in an inverse relationship.

Hurt points out the current cattle production cycle is at the end of an 8-year decline in cattle numbers that began in 2006. Beef cow numbers were 32.7 million head in 2006. At the start of 2014 they were 29 million head or 11 percent less.

That's true technically, given a couple of minor annual increases in cow inventory. In actuality, though, the nation's beef herd has been losing cows for going on two decades.

“Studies of those cycles suggest that prices tend to reach their cyclical peak in the early phase of cow expansion as the industry begins to rebuild the herd,” Hurt says. “There are two reasons for this: first, the number of market-ready animals is already small due to the contraction that has been going on; and second, the retention of heifers and cows further reduces slaughter animal numbers even more thus pulling down beef supplies.”

Plenty of evidence in recent months points to evidence of herd expansion via both reduced cow slaughter and increased heifer retention.

According to Hurt, beef cow slaughter is down 18 percent so far this year compared to 2013. In the most recent quarter, it was 23 percent less.

“In addition, the dairy industry is contributing to reduced beef supplies as milk cow slaughter is down 11 percent year-to-date,” Hurt says. “The milk industry has also likely begun an expansion phase.”

At the same time, beef heifer slaughter is 9 percent less this year compared to last; 11 percent less in the third quarter.

“Using the year-to-date rate of reductions for all of 2014 would result in heifer slaughter being down 770,000 head, beef cow slaughter down 550,000 head, and dairy cow slaughter down 340,000 head for the year. These sum to nearly 1.7 million fewer females going to market this year and thus lowering slaughter numbers by over five percent,” Hurt explains.

“Offsetting the argument for even higher cattle prices to come is the expectation for growing supplies of competitive meats starting in the second quarter of 2015,” Hurt says. “This is the argument that beef consumers will have lower-priced meat and poultry alternatives by the spring of 2015 and therefore new record high cattle prices will become increasingly difficult. To the extent this is true, it may shorten the window of opportunity for new record cattle prices to this fall and winter.”

Of course, whenever peak cyclical prices come, it's not like they'll plummet on the other side. There are just so few cattle relative to demand.

In the meantime, Darrell Peel, Extension livestock marketing specialist at Oklahoma State University offered perspective in his November marketing comments about considering management decisions amid the highest cattle prices in history.

“Consider this question, for example: What is the optimal level of death loss for cows or calves?” Peel asks. “While we don't often think about it, the optimal level is not zero. Could we achieve zero death loss? Probably yes or something very close to it, but the last bit of death loss reduction would require extreme measures for which the costs exceed the benefits and thus is not optimal. However, the increase in calf values this year means that additional efforts to reduce death loss are warranted compared to what was optimal in the past.”

It's a question of marginal cost versus marginal benefit.

“Most production factors should be evaluated to see if marginal adjustments are indicated by increased animal values,” Peel says. “The principal market signal at this time is to have something to sell and producers should consider additional measures that will enhance productivity of the entire operation.”

Figuring Out the Relative Worth

In other words, Peel explains, “The sharp jump in revenues this year (marginal benefits) implies that producers should consider a host of marginal changes in production and costs. This may mean doing more of something you are already doing or beginning to do something you have not done in the past.”

But, Peel says, if you focus too narrowly on technical efficiency, you run the risk of losing in net terms.

“Narrow measures of technical efficiency often lead to non-optimal decisions,” Peel says. “For example, high calf prices are a motivation to sell more pounds of calf. However, a narrow focus on weaning weights ignores reproductive efficiency, cow size and cost of production, and other factors. Maximizing value of production per acre includes both technical production efficiencies as well as economic values of inputs and outputs. Maximizing value of production per acre means evaluating the contributions of a host of cattle and forage production variables along with the costs of inputs used for production.”

In this case, he explains, “Pounds of calf weaned per exposed female is a technical measure of productivity that encompasses several other technical efficiency parameters including conception rates, calving percentage and pre-weaning calf death loss, as well as weaning weight.”

So, to the extent that increasing pounds of calf weaned is consistent with maximizing the value of production per acre, Peel says producers should evaluate changes that could affect these production components.

“Conception rates may be boosted marginally by having cows in better shape at breeding. The extra feed required to add one-half to one body condition score to cows may be worth it this year,” Peel says. “Ensuring bull fertility with breeding soundness exams may avoid decreased or delayed conception. Ensuring cow and bull health with respect to venereal disease and enhanced bio-security for new animals entering the herd can avoid abortions and reduced calving percentage. Cow and calf health programs should be evaluated to reduce the risk of death loss. Think of the value of increased monitoring of cows at calving that saves one extra calf this year. These are just a few examples of questions that need to be asked and answered in all cow-calf operations.”

As for those peak cattle prices, Hurt explains prices derived from futures suggest fed cattle prices in the upper $160s for the remainder of the year, about where cash prices were the second week of November. From there he explains futures indicate fed cattle prices in the mid to upper $160s into April.

For perspective, Hurt notes fed cattle prices were about $135/cwt. at the beginning of 2014. Those were record-high prices at the time. Fed cattle carved out new record-high prices in March at $150, then again in July at $160 and most recently at $170

“Starting in the spring of 2015, increased supplies of chicken, turkey, and pork will provide consumers with ready alternatives to high priced retail beef and cattle prices may weaken,” Hurt says. “That weakening of cattle prices in the spring of 2015 is not a collapse, just a failure for cattle prices to keep making new record highs again and again as was the case in 2014.”







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