I’m no doctor. The pandemic strategy, vaccine, trajectory, and those impacts on human health I’ll leave to the medical experts. However, those impacts will indirectly, or directly, impact the larger picture of beef demand.
The COVID-19 pandemic directly impacted the beef industry in the second quarter of 2020 by both shutting down slaughter facilities and impacting supplies, but also affected the demand components by shutting down restaurants, travel, and hospitality. It forced consumers to cook at home and changed their buying patterns, possibly for good. After the initial disruption there have been relatively few new supply disruptions since the second quarter.
The remainder of 2020 has very much been a demand story. As I write this in the fourth quarter of 2020, there have not been slaughter disruptions so far in this quarter, even as cases have once again began to rapidly increase. The industry, regardless of the virus’ next move, is much better prepared to weather these issues than it was in the second quarter.
Millions have been invested in personal protective equipment and strategies have been developed through the trials of the year. This is good news for the cattle industry and will limit uncertainty in some respects compared to earlier this year.
That’s not to say life in the cattle/beef industry will get any easier. One of the major themes of 2020 was the uncertainty in the demand profile, and that is expected to continue into 2021. Beef demand outcomes are hinging on restaurants being open, and the travel and hospitality industries returning to the normal volumes. Regardless of the virus outcomes above, those sectors may not mirror virus recovery or even economic recovery.
[inline_image file=”df42e392d385497b35aeaba97d54010d.jpg” caption=”Cowboys move cattle across the road. Photo taken June 21, 2019 near Pray, Montana located in Park County.”]
We have potentially entered into a timeframe, similar to post-Sept. 11, 2001, where those sectors’ recovery to normal takes much longer than getting the virus under control. This is expected to be a key backdrop to any cattle and beef outlook for the next one to two years. The analysis suggests it is no longer looking at a quick bounce-back filled with pent-up demand for these sectors.
More specific to cow-calf country has been the more “normal” struggles of being a rancher. Drought was a major factor for Western producers and intensified throughout the year. Other hay prices for many Western states surpassed alfalfa prices, a somewhat unusual phenomenon.
When looking at the cattle markets, and assessing drought impacts, I tend to group them in four types based on how they affect feed availability. The easiest to deal with is a localized drought. The conditions are not widespread, it can affect each ranch differently, and, as the operator, there are a few changes, such as buying additional feed, supplemental hay feeding or marketing calves a bit sooner.
These are the years where you see operations liquidate, and they can be challenging to manage given the uncertainty in length of time and cost.
The next type is one that has a widespread impact on forage conditions and pasture and range. Fundamentally, cows need to be managed differently, and pastures will need to be juggled more than a typical year to meet the operation’s needs. This type of drought is usually not affecting the major feed grain sources, so typically it will not impact the feeder sale prices, and will tend to hit cow-calf operators more than feedlots. I would argue this is the type of drought we were in most of 2020.
The last two types include those affecting feed grains, so an example would be the Midwest crop issue. Feeder cattle prices are dramatically impacted and if pasture conditions are good, that can provide some flexibility outside the feedyard. The last type of drought impacts both forage and feed grains.
Other hay prices are unlikely to come down during the year and will need to wait for first cutting next year to see price relief.
This is the most problematic because pasture and range is not there to support cattle outside the feed yard, and high feed costs are detrimental to feeder cattle prices. These are the years where you see operations liquidate, and they can be challenging to manage given the uncertainty in length of time and cost.
Most of 2020 was spent in the first two types of drought, where it was either localized or mostly pastures were affected. The corn and soybean crop, though, has introduced a post-harvest curveball to feed outlook. USDA dramatically reduced yield over the last couple of months and price projections have jumped substantially. Admittedly, this isn’t solely drought induced, but the derecho in August was a weather event of a different kind. Still, feeder cattle prices have adjusted in response.
More importantly is the tone this now sets for a short crop of feed grains, and lower hay inventories for next year. Hay stocks are expected to be quite low in some regions and have already seen high price points. Other hay prices are unlikely to come down during the year and will need to wait for first cutting next year to see price relief. Feed grain prices will be determined based on projections of exports and analysis of the South American crop.
Calf prices are expected to improve substantially because of the combination of smaller cattle supplies at a time when the demand profile in 2021 is improving.
These markets are expected to be volatile between now and planting of the U.S. crop. Planting will help determine future feed cost outlook, but a second year of drought in the West will add to feed issues and the potential for major culling events more likely. This is a critical point to watch for in 2021.
Rebreeding cows was a topic last year that received a lot of attention given the large run-up in beef cow slaughter in the last six to eight weeks of 2019. History appears to be repeating itself with large beef cow slaughter volumes accumulating late in 2020. We suspect many of these culls are from cows that are determined to still be open. If this is the case, this is an issue the industry will need to address through genetics. However, from a marketing standpoint, a smaller beef cow herd on Jan. 1 seems imminent.
The current Livestock Marketing Information Center (LMIC) forecast is that the beef cow herd will be down about 1 percent in the Jan. 1 Cattle Inventory report released by USDA National Agricultural Statistics Service. This would mark the second year of a declining beef herd and further confirm the cattle cycle’s contractionary phase. The positive news for cow-calf producers is this will shorten the calf crop and increase calf prices in subsequent years.
Calf prices are expected to improve substantially because of the combination of smaller cattle supplies at a time when the demand profile in 2021 is improving. Cattle feeders are expected to also have positive returns. The wild card remains feed costs, which could dampen demand for feeders and/or adjust prices lower to accommodate the higher inputs.
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LMIC is projecting annual average 500-600-pound animals to increase 3-5 percent in 2021 over 2020 annual figures and continue to gain in 2022.
Using those calf price forecasts, cow-calf cash returns (not including government payments) are also expected to be positive in both 2021 and 2022. Looking at the long-term horizon, the profits are not expected to alter the current cattle cycle in the next two years, given all the uncertainty that still exists with regard to COVID-19 and beef demand. A strong 2021 could make that projection change, but it would require a very strong year for cow-calf operators, and the likely absence of drought.
Cull cow values are also factored into the LMIC cow-calf projections. Cull cow values benefited from the stellar ground beef demand both in Second Quarter and Third Quarter of 2020. Lean beef trimmings have fallen off in the last quarter of 2020, which is not supportive of cull cow values currently or in the early part of 2021.
This is expected to be somewhat short-lived, and the cull cow values will likely be pulled higher in 2021 by the gradual opening of restaurants, events, conferences and sporting events even if retail sales pull back from 2020 levels. Further supporting cull cow values has been the substantially smaller dairy cow slaughter which points towards an expanding dairy herd. This too should help support cull cow prices from the supply side.
[inline_image file=”fbb7ef87b0a43f84c11fd8de64616ab0.jpg” caption=”cow calf returns.JPG”]
There are some big themes in 2020 that are still going to be around in 2021. Many of them are not within an operator’s control. However, drought is at least something that all operators have dealt with at some point and having a couple of strategies and the nimbleness to navigate those situations could be pretty important in 2021.
The take-aways are that feed costs seem likely to increase next year. There are not many drivers pointing to less expensive feed at this point. That goes for hay, corn, and soybean meal. Flexibility on the feed side could be advantageous next year along with a flexible marketing plan. At the same token, most of the calf price indicators are pointing to better prices ahead, but that assumes that the U.S. and rest of this world are in a better COVID-19 place than they were in 2020.
