A recent report by Rabobank shows U.S. cattle producers and beef processors face mounting challenges in managing production and price risks. As the industry grapples with these difficulties, there is a growing call to bolster resilience across the supply chain, mirroring the dedication previously shown in boosting demand over the past three decades.
Lance Zimmerman, senior animal protein analyst at Rabobank, stated high consumer demand and low supplies have created higher market prices, exposing the market to greater financial risk. Zimmerman continued that the high cost of inputs and cattle prices have muffled signals that lead to herd rebuilding.
The recent downturn in cattle futures prices on the Chicago Mercantile Exchange highlights the industry’s volatility. Despite a significant rally from pandemic lows in 2020 to highs in 2023, with live cattle futures climbing 120%, challenges persist for cattle producers and beef processors, the report said.
Factors such as ongoing cow liquidation, elusive heifer retention, production risks exacerbated by drought and escalating input costs—including a 70% rise in corn prices, a 48% increase in alfalfa prices and a 65% surge in retail diesel prices from 2020 to 2023—underscore the need for resilience in the face of mounting pressures, the report continued.
Rabobank forecasts continued growth in consumer beef prices and cattle markets through 2026. Still, sustained periods of steady or decreasing costs are necessary to incentivize producers to begin a multiyear herd rebuild. However, the report pointed out that cattle producers’ confidence is being shaken by tightening consumer budgets, rising recession risks and fluctuating margins, all of which require consistent profitability for the next herd rebuild to materialize.
The report continued it expects consumers to pay more for beef, which should bolster growth in the cattle market. However, cow-calf operations require more than just elevated prices and immediate profitability to initiate herd rebuilding. Ensuring consistent cash flow and reliable returns for cattle producers must become a primary industry objective to incentivize and retain new operators throughout successive cattle cycles.
Drought stalls efforts
Zimmerman wrote that drought has posed a significant challenge for U.S. cattle producers in recent decades and will continue to be a significant concern for the industry in the coming years, leading to a slower and weaker cow herd rebuild in the next cattle cycle.
Despite efforts to creatively source feedstuffs and manage pasture resources amidst widespread drought, continued ingenuity will be crucial for rebuilding the U.S. beef cow herd and seizing opportunities in the cattle market. However, uncertainties surrounding precipitation levels, particularly with the transition to La Niña, cast doubts on the potential for sustained pasture refreshment, further complicating herd rebuilding efforts. With moderate to severe drought still affecting a significant portion of the U.S. beef cow herd and hay stocks at historically low levels, many cow-calf operations are compelled to sell rather than rebuild herds.
Despite upward price trends, lingering forage and margin uncertainties impede aggressive herd growth, necessitating a slower recovery of U.S. beef cow inventories. The best-case scenario is herd stabilization in 2024 and subsequent rebuilding by 2025. As climate patterns continue to pose challenges, cattle producers will focus on building a more efficient and drought-resilient cow herd over the next decade, emphasizing factors such as cow size, stocking rates and rotational grazing programs to enhance pasture and forage utilization and promote herd resilience.
Capacity balance elusive
Zimmerman said the industry is grappling with a delicate balance between cow numbers and packing capacity, which presents a significant challenge for market participants.
While cattle numbers have dwindled to levels not seen since 1952, the processing segment is expanding its weekday packing capacity by an estimated 12,000 head, anticipating a herd rebuild that has yet to materialize.
“That involves transitioning from a commodity mindset to a collaborative approach where production risk, value creation and market positioning are shared functions among all participants,” Zimmerman said. “With this approach, the industry can encourage industry investment by distancing itself from the violent and unpredictable margin swings that come with the traditional cattle cycle.”
Zimmerman continued achieving a more stable infrastructure necessitates aligning available supplies with capacity constraints, shifting from a commodity mindset to a collaborative approach where production risk, value creation, and market positioning are shared responsibilities among all stakeholders.
As cattle producers faced challenges, packing margins thrived, prompting increased calls for expanded capacity within the industry. Rabobank said over the next three years, packing plants are expected to face tighter margins, presenting additional challenges for new entrants.
“Recent government intervention—and the political pressure to avoid food supply chain failures—may create a market disruption that allows beef processors to endure fundamental supply challenges for longer than previously possible,” Zimmerman said.
Pursuing resiliency
The report stated the U.S. beef industry is contending with a progressively intricate and demanding business landscape marked by unpredictable climate patterns, supply fluctuations and shifting margins, which amplify production and price risks across all sectors.
However, Zimmerman noted there is an opportunity to mitigate these risks by enhancing vertical coordination, embracing technology, engaging in public policy advocacy and exploring other strategic avenues.
“The U.S. beef industry prides itself on a foundation that starts with independent cattle producers and continues with distinct segmentation from grower to finisher to processor,” Zimmerman said. “Each segment independently focuses on production efficiency and marketing to ensure economic viability.
“That independence is a central part of what keeps many ranchers viable,” Zimmerman continued. “Yet, the business environment is becoming increasingly complex and challenging. In Rabobank’s view, a more vertically coordinated supply chain will be an important approach in managing this complexity.” — Charles Wallace, WLJ contributing editor
