Cattle Profitability: What Does 2011 Look Like & Why?

What does the economic crystal ball say about profitability in the cattle industry? And if you can get an answer, is the answer clear, or is it as murky as the summer watering hole? If there is some profit in cattle, is that a function of supply or demand? And are there any surprises that you should know about?

In his outlook for 2011, Purdue economist Chris Hurt says calf and feeder cattle prices will be strong along with the higher finished cattle prices. That sounds like a good prospect for the coming year, but he does add, “Ultimate feed prices will be important to the final determination of calf prices this fall.” But after years of red ink for beef production, what has gotten us to this point? Hurt says, “In adjusting to the higher feed prices, beef production has kept falling and is now down more than 10% from when corn averaged closer to $2.00 a bushel prior to 2007. While the small production will help strengthen beef prices, the beef industry will continue to lose consumer market share.” And the latter is a function of the economy, not anything that cowboys have done to shoot themselves in the foot.

At Iowa State University, livestock economist John Lawrence supports the position of Hurt that demand will recover slowly with the economy and tight supply should support prices. But why the tight supply if there is profitability? Lawrence says herd liquidation will continue into 2012, so supply of beef continues to decline. The decision to reduce inventory on the part of the cow-calf producer is the higher cost for cow herds and the higher cost of gain pressures calf prices. So there will be fewer calves produced from fewer cows and supply will be the driver for profitability.

Going into 2011 and beyond, University of Nebraska livestock economist Darrell Mark says what you see is what you get, because 2011 will be a lot like 2010. Mark says there may be more demand from an improving economy, but the lack of supply will be the bullish driver for cattle prices next year and in 2012, “Cow herd liquidation in 2010 will cause beef production to further tighten over the next several years. Supplies of feeder cattle will also grow increasingly tight, yet prices will be heavily influenced by volatile feed grains market.”

Prices, says Mark, will be 1% to 3% higher in 2011 than in 2010, and calf prices in particular, will be better for the cow-calf producer, “Yearling prices are then expected to seasonally increase in the second and third quarters with prices averaging in the $110 to $120 per cwt. range. Calf prices are expected to post an increase of around three percent for the year compared to last year.” And he says prices may surpass the 2008 record, “So, the forecast for 2011 is relatively bright in that annual average fed cattle prices are expected to surpass the record set in 2008 (5-market average of $92.78 per cwt. in 2008). However, significant questions abound regarding the demand side. Additionally, volatility in feed grain markets can still make it difficult to realize a positive feeding margin.”

The challenge in maintaining a positive feeding margin may be managed by the “livestock crush” concept of John Lawrence. He says it tracks the cattle that will be marketed in the next five months. “The crush margin for cattle currently on feed assumes that the corn price is pegged at the cash price the month the feeder animal was purchased and place on feed. For example, the crush margin for cattle to be marketed in December are currently at the over $200/hd. If a $150 crush margin is needed to breakeven, then a hedge on hedge on fed cattle will deliver a return of over $50/hd. For cattle to be marketed in March, the crush margin is near $250/hd, or $100 profit per head if a hedge were placed at the current April live cattle futures contract price. Lawrence says the market fundamentals may be strong, but he doubts the cash price is going to reach the same $110 mark targeted by the future market. He advises producers to keep close track of prices because negative news for the economy could push fed cattle prices below $100/cwt.

But again, that is a demand issue that is supporting the market. There is a significant supply issue that the market should also be watching, believes Derrell Peel at Oklahoma State. Peel says fewer cattle numbers have been the driver in his viewpoint, and it is no secret we have the smallest beef cow herd since 1963. But he has some significant concerns about the basics of what is occurring. Peel says we have decreased the overall inventory, but because we have feed them with cheap corn, production was maintained through 2006. But he says life has changed, and higher priced corn pushes cattle through feedlots faster, and total cattle slaughter for 2010 is about 2% higher than 2009.

But Peel says steer slaughter is up less than 1% this year, and heifer slaughter is up nearly 3% and cow slaughter is up 4%. “It is clear that we are maintaining slaughter rates, in the short run, with our females.” Peel cautions this is not sustainable without accelerating herd liquidation. At some point, the U.S. cattle industry will try to stabilize the herd size and then expand a bit. “Given the current situation this implies a significant reduction in cattle slaughter in the short-term just to hold the cow herd size steady,” he said. “It seems likely this process will start in 2011.”

Lawrence at Iowa State confirms the data cited by Peel. In a recent presentation Lawrence says for the year to date, steer slaughter is up 0.9% with weights down 2.0%. Heifer slaughter is up 2.6% with weights down 2.2%, and beef cow slaughter us up 10.4%. With such a decline in the breeding herd, most of the livestock economists point to 2012 as the earliest that any supply turnaround is going to happen.

Summary:
While there is some growing consumer demand for beef, it is the supply of beef and the overall trend in the breeding herd that is driving profitability. More heifers and cows are being slaughtered than steers extending the time that it will take to increase beef production. Profitability in 2011 will be about the same as 2010.

By Stu Ellis, University of Illinois

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Published in: on November 25, 2010 at 9:57 am  Leave a Comment  

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