The beef industry is in a position that in many ways is unprecedented. The U.S. cow herd is at a 60-year low, with parts of the country still dealing with drought while others have had too much moisture. This low inventory is driving record prices for feeder cattle—prices that are well past what the cattle can be hedged to assure breakeven. Feedlots are betting on cheap feeds and consumer demand to balance their ledgers.
With record prices, producers that normally carry cattle over and market them as yearlings or on the rail will be evaluating if they should sell their calf crop as calves. It is a matter of determining how much value they can add with more days owning their calves versus the cost and risk to achieve it. If producers do sell calves, it is important to talk to their accountants ahead of time about the tax implication of marketing two years’ production in one tax year.
When the industry does start to rebuild, it will remove heifers from the already tight feeder calf supply, which will result in even higher feeder calf prices in the short term. There is a lot of talk of beef-on-dairy impacting the market, but it really doesn’t change supply. The calves out of those dairy cows were already in the beef chain. The only change is they will now have better conformation and be more profitable to feed and harvest. The bottom line is the fundamentals of the market outlook are strong, and certainly have the potential for record profitability for the cow-calf sector for those whose herds remain mostly intact after the drought.
Pens should remain full at the large, modern feedyards. However, feedlots with aging and inefficient mills and/or aging pens resulting in higher yardage overhead or inefficiencies, very well could have empty pens because of their inability to be competitive given the cost of inputs.
Political uncertainty
However, at the same time, we have a presidential election with candidates with divergent philosophies on most issues, which adds a great amount of uncertainty to our economy. If they have one thing in common, they both have demonstrated a talent for deficit spending, with President Joe Biden showing abilities that may be unique in this regard. For those that lived through it, the situation comes close to the ag crisis of the late 1970s and early 1980s. Tell a young person that at one time, the industry was once faced with production loans that had 20% interest rates—which occurred during this time period—and you are likely to get a blank stare back. It is too far from their reality for many people to comprehend.
Leading up to the ag crisis of the 1970s and 80s, agriculture saw a rapid escalation in land prices, strong export demand for agricultural commodities and large deficit spending. The final blow was when the Carter administration implemented a grain embargo on the former Soviet Union, which imploded the domestic market that was being produced on record-priced land with loans, which suddenly had interest rates no one could have anticipated. Jumping forward to today, it gives one pause, knowing our current leaders make those of 45 years ago look like amateurs in their ability to deficit spend
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Frankly, our presidential choices do not inspire me with confidence that they can guarantee us policies that will lead us on a path that will maintain or improve the export market for our agriculture commodities, particularly for beef. Most of all, we need the next president to not use the high-quality, abundant food this county produces as a weapon in their foreign policy.
Make no doubt about it, export is the key to the U.S. beef industry’s profitability. Export markets not only supply demand for our top-quality middle meats, they also are critical to our ability to market hides and varietal meats like hearts, livers, tongue and kidneys—items Americans have little taste for. In the end, we just don’t know the potential impact either candidate will have on future trade. However, with the current aggressive behavior of Russia and China, as well as the Middle East, there is room for concern.
Optimism for beef
On the bright side, consumers enjoy beef, and today, we are producing the best-quality product we ever have. In addition, producers and feeders are getting paid better for producing a quality product more than ever before.
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Among the quality products, Certified Angus Beef (CAB) has caused a fundamental shift in the market with CAB and premium quality Choice becoming a defacto quality grade on grids. The price spread between commodity Choice (bottom one-third of USDA Choice) and premium Choice (upper two-thirds Choice marbling scores), as well as the Choice to Prime spread has in many cases overtaken the Choice-Select spread in determining the value of many loads of cattle. It was not that long ago when not enough cattle qualified as premium Choice and Prime to truly establish the market on these endpoints. Boy, have times changed.
CAB changed from requiring carcasses to be USDA Yield Grade 3 or better to accepting USDA Yield Grade 4s. Overall, the industry fairly quickly jumped its backfat target from 0.4 inches to 0.5 inches, and before long it went to 0.6 inches and above. This extra fat ends up on the rail and not on the floor, so producers are paid for the extra weight the fat puts on a carcass. Grade would also increase, but with diminishing returns past a certain physiological state. Efficiency of gain also decreases at these fatter endpoints, but the amount of finish feeders are putting on cattle seems inelastic to the grain market. Today, cattle qualifying for CAB can have up to one inch of backfat measured at the 12th and 13th rib.
With supply tight and grain prices expected to be lower than average, it can be assured that feeders will be maximizing carcass weights. With pounds and quality grade driving grids, there will be incentive to take cattle to these heavier weights with potentially an unprecedented amount of finish. Cattle having more days on feed will also partially offset feeders’ ability to keep pens full.
The grind market has also been strong and is expected to remain so in the future. With plenty of tallow from fed cattle available and inventories low in the cull cow market, the industry can expect seasonal records for cull cows, and tremendous demand for cull bulls. We are also likely to see strong imports of cheap lean from low-cost producing countries that will be mixed with the tallow from the trim from the domestic fed cattle harvest to produce a portion of our ground beef.
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Consumer demand for high quality beef and grind are expected to remain strong as long as the economy maintains its current strength. The only problem that could derail demand is if the consumer’s purchasing power weakens combined with increasing beef prices. It would be unlikely the industry would get into this situation when it comes time to harvest this past spring’s calves, but it may be a concern in the long run; particularly when rebuilding occurs with more heifers being retained instead of fed, further tightening supply. And of course, the presidential election is another source of uncertainty.
Rebuilding the cow herd
Rebuilding the cow herd after significant liquidation due to drought generally occurs fairly rapidly with the return of moisture. Droughts have a cleansing effect on herds, with questionable cows for any number of traits—reproduction, disposition, productivity, soundness, broken mouth—going to town to be marketed. When they are replaced, it is with young females with their productive lives ahead of them. The price gap narrows between top-end genetics compared to low-end genetics in a low supply, high demand market. As ample supplies return it will widen again.
Prior to the drought, producers’ cow herds in the West were often populated with cattle too big, with too much growth and milk potential for their environment to sustain. This was occurring while at the same time, payweights on their calves have remained flat, while the cows’ Stayability EPDs have been rapidly decreasing.
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Assuming most of the cows described in the previous paragraph were culled because of the drought, a producer has a unique opportunity to restock with bred heifers or young cows with genetics better suited to their environment. They can also evaluate the use of heterosis and breed complementarity. In this respect, it is an exciting time in the industry.
However, most predict rebuilding the cow herd this time will be atypical. The average commercial cow-calf producer is over 60 years old and will likely ponder whether they want to invest in a group of high-priced replacements at this stage of their career. Some might decide to not rebuild at all, or even exit the business when the value of their cattle may be higher than it has been at any point in their lifetime. In addition, the opportunity cost of many producers’ land may make it more attractive to sell the land than run cows. We shall see; however, it is unlikely the nation’s herd will return to previous numbers.
It is a wild time in our industry, and producers have a lot of decisions to make. There is also tremendous opportunity when the right decisions are made, for each producer’s particular circumstances. In the end, make the decisions you can with as much information as possible, and then cinch your seatbelt tight and enjoy the ride.
