The large increase in beef cow and heifer slaughter had many analysts anxiously waiting on the Jan. 1 USDA Cattle report. The weekly beef cow slaughter data through the middle of November indicates cow slaughter was up 12.14% year to date, and heifer slaughter was up 4.85% from 2021 figures.
The largest difference between this drought liquidation cycle and the last go-round is the extraordinary number of heifers that are in the beef supply chain. This created different impacts: prolonged higher beef supplies through most of 2022 compared to 2021 and limited abilities to grow the beef herd for at least two more years.
In this article, we will focus on the second point and the meaning for cow-calf producers. Timing is everything. But with most of the female calf crop making its way into feedlots, there will be very little producers can do within their own herd to add breeding stock. This is likely to drive replacement costs to extreme highs, but it may depend on the region of the country. Rebuilding can only happen if feed supplies in the form of pasture or hay are available to keep additional cows.
Replacement costs
That may take longer for the southern Plains than for the northern Plains, which has already had a one-year break from drought. I expect the northern Plains’ replacement costs to increase sooner than the southern Plains’ costs. How fast or how high is anyone’s guess, but in 2014 and 2015, many producers felt sidelined by the high costs to rebuild. That history will very likely repeat itself.
Rebuilding the herd will take a considerable amount of time, and we will very likely not see a turn in the cattle cycle until 2025 or later. This extended contraction phase may reach a plateau at the bottom because the heifers have not been kept on the farm to breed.
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However, there are some caveats to this line of thinking. For one, we only know that the 2022 calf crop did not appear to retain many animals. Watching cattle on feed in 2023 will provide some evidence as to what extent that is happening again, but it may be masked by the general declines in the calf crop from a smaller herd and the simple comparison to the enormous numbers of 2022. Measured and careful thought will be needed to decide if cattle from the 2023 calf crop are being held as replacements for rebreeding. Still, those replacements will not be providing calves until 2025. If heifers continue to enter the beef supply chain because of continued drought or advantageous marketing conditions, then the rebuilding phase gets kicked out another year and will face the same hypothesis.
Hay supply and high prices
One serious risk to cow-calf producers and their ability to hold onto cows or rebuild has been the hay situation. This is expected to remain a risk throughout 2023. The high prices commanded by other feed commodities make the prospect of gaining significant acreage unlikely. Other hay prices hit a record high nationally in the last marketing year (2021-22), and that record is expected to be taken out in 2022-23.
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In the summer of 2022, national other hay prices launched above $180/ton, with some regional offerings much higher. Throughout the rest of the winter, hay supplies will continue to be historically tight. The next marketing year may not look much better without a significant recovery in yields.
Calf prices
Current slaughter rates imply the beef cow inventory number could be down close to 5% on Jan. 1. This type of decline would be associated with a calf crop reduction of a similar proportion. The result will very likely be calf prices over $300/cwt in the next three years. But the issue is timing, and it’s difficult to project a top of the market. Calf prices did not explode in the last drought until the cattle cycle actually turned in 2014. This was in part because so many heifer calves were retained. If we believe the transition to year-over-year growth in beef cow numbers is not going to be until 2024, then it is very likely that year will see the cyclical peak of calf prices as well.
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The previous high was just under $300/cwt for steer calves in the southern Plains. At the time of this writing in early December, those calves were averaging $190.41/cwt in November, which most similarly correlates with the price patterns of 2013 and implies there is more upside still to come. The Livestock Marketing Information Center (LMIC) has forecast an annual average of just over $200/cwt in 2023 and $240/cwt in 2024.
This may be too low on all accounts if heifer retention begins earlier than expected or if 2023 spring green-up is stronger than expected. There is a lot more upside potential than downside in this market. The downside risk factors include continued drought impacting pasture and range, although we still expect calves to hold value relatively well given the tightness in supplies.
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We would view this more as an upside limitation rather than downside risk, and it will change the timing of the peak to some degree. Timing is the most difficult part of this to pinpoint, but just as we saw in 2014, there will be a rapid escalation in calf prices. It could be in 2023, 2024 or later. However, we expect calves to hold at over $200/cwt annually the next three years, even if the peak is elusive.
Feedlot numbers
Along with the rosy picture that has been painted for cow-calf producers, feedlots will likely be open to more risk in the next three years. Fed cattle prices are projected to move higher but have an overhang of uncertainty regarding beef demand. Beef demand has been much better than expected over the last year, but macroeconomic uncertainty looms large, and it’s unclear if consumers will allow beef prices to move significantly higher at the retail space, which would allow for better margins at the packer and feedlot levels.
Feedlots, in addition to contending with high hay prices, are tasked with managing through a volatile corn and soybean market. South American crops may ease some prices, but until the next U.S. harvest in 2023, corn prices are not expected to see much relief. This may limit feedlots’ ability to pay for feeder cattle, which might cause some interesting price relationships between calves and feeders unless fed prices allow for ample margins.
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LMIC is projecting cattle feeding returns will be negative in the second quarter of 2023, but if feeder cattle react normally to feed costs, this will also have several positive points.
What does that mean for retained ownership? Be careful and optimistic. There will very likely be some opportunities. Lightweight calves take a lot of days on feed, but the good news is that if they are yours, you won’t be paying the high prices at the auction barn. There will be windows in 2023 where retained ownership will make a lot of sense, particularly later in the year during the late third quarter and fourth quarter of 2023.
Given the recent drought risk and high feed costs, locking in feed would mitigate some of the substantial risk elements that are out there for that time period. Fed cattle prices may be worth locking in as well, as 2023 is expected to be a volatile price year, and uncertainty about beef demand still looms.
