Cow herd expansion needed
by Tom Field, Ph.D., Executive Director, Producer Education – NCBA
Determining which direction to move cow inventory is influenced by profitability, domestic and export beef demand, input costs, competitive strength of alternate land uses and pressure from competing proteins. The United States is experiencing 50-year lows in beef cow numbers, feeder calf supplies and total cattle inventory. Inventories have declined to the point that feeders and packers may have to dramatically reduce their production infrastructure which raises concerns about the ability of the industry to rebuild capacity in the future when conditions improve. Furthermore, due to the long biological cycle of beef production, the cow-calf sector is less able to respond quickly to shifts in demand as compared to the pork and poultry industries. However the signals for herd expansion are aligning based on forecasts for a strengthened economy in 2010; improved pasture, hay and feed grain conditions; and favorable cost of production trends.
During the past 15 years, approximately 150,000 producers have exited the cow-calf business. U.S. Department of Agriculture (USDA) data show that the U.S. beef industry is at 50-year lows in total cattle inventory, beef cows and feeder calf supplies (Table 1). Inventory has been reduced despite a 12-year run of profitability for the average cow-calf producer during a concurrent period of steady-to-increasing beef demand. As a result many industry analysts project that additional cattle feeding and beef processing capacity will be idled over the next year as the industry strives to balance its infrastructure capacity with available cattle supplies.
Beef cow inventory shifts are typically influenced by profitability, domestic and export beef demand (typically a reflection of overall economic strength), input costs, competitive strength of alternate land uses and pressure from competing proteins.
Without question, the U.S. and global economies have taken a beating and the agricultural sector, including beef, has not been immune to equity losses, cash-flow problems and a host of other challenges. During 2009, consumers changed their habits by increasing savings, moderating personal spending and attempting to bring debt back to manageable levels. Projections about the U.S. economy are widely divergent but the message seems to be that 2010 should be the turning point with a 2 percent to 2.5 percent rate of growth. That growth will translate to the beef industry as the Livestock Marketing Information Center (LMIC) projects that while cow-calf producers struggled to exceed breakevens in 2009, 2010 and 2011 appear to be opportunities for profitability for the average producer.
The United Nations’ Food and Agriculture Organization projects the world’s growing populations will double demand for protein by 2050. History has shown that beef demand rebounds with economic recovery in both domestic and international markets. For example, China’s economy lagged behind the rest of the world through the 1960s and 1970s with consumption of animal products hovering around 5 grams per person, per day. Yet when the economy of China boomed resulting in significantly higher disposable incomes for Chinese citizens, daily intake of animal protein grew to nearly 35 grams per day in the period of 1980 to 2002. All other factors being equal, increasing beef demand in the United States is more a question of “when” than “if”.
Dairy and swine industries react to low profitability
Faced with declining prices coupled with a rapid rise in costs, dairy producers are experiencing significant losses. In response, the dairy industry initiated three dairy herd buyouts through its Cooperatives Working Together (CWT) program. At press time, dairy cow harvest tracks nearly 15 percent more than a year ago. As a result, the number of harvested cows (beef and dairy combined) is 2 percent more than one year ago and 15 percent more than the running five-year average.
The pork industry has lost nearly one-half of its equity in the past 18 to 24 months sustaining losses of $20 per head. The underlying causes of these losses are high feed prices fueled by the heavily subsidized ethanol industry’s growth and the fallout of H1N1 influenza. Even with corn prices readjusting from the speculative highs of 2008, feed costs have added more than $25 of additional cost to each hog marketed compared to the first half of 2007. Pork producers are sure to reduce the breeding herd and they recently asked USDA to allocate $150 million to buy excess pork volume. Thus, for the remainder of 2009 and perhaps into the first half of 2010, market cow prices will be under downward pressure as dairy and hog producers shrink their breeding inventory.
Year-to-date precipitation levels have been excellent and with the exception of south Texas, the United States has generally avoided sustained drought conditions. With excellent fall forage conditions, beef producers have the potential to send the breeding herd into winter in excellent body condition with most of the nutrients provided via grazed forages. In many cases, producers anticipate that they may be able to graze longer than typically expected and thus be able to reduce supplemental feed costs.
While haying season was confounded by excellent rainfall, thereby reducing the overall quality of early cuttings across much of the primary beef producing region of the country, the overall volume has been sufficient to reduce alfalfa and hay prices significantly compared to 2008. In some states, alfalfa is lagging nearly $100 per ton beyond prices for the previous year (Table 2).
If weather remains favorable, the Heartland is on track to yield an exceptional corn and soybean crop. The Oct. 9 U.S. corn supply forecast by the World Agricultural Outlook Board calls for this year’s production to exceed the previous year by 7.6 percent, resulting from high harvested acres and bushels per acre. Some forecasters call cash corn prices at levels below $3 per bushel in the last quarter of 2009 and into 2010. While a government decision to change the ethanol blend could have an impact on corn prices, the overall picture for feed prices remains far better than late 2007 and 2008.
Another factor that may impact cost of production is the sizeable release of Conservation Reserve Program acres, most of which are grasslands. Assuming that grain prices are subdued in the near term, these acres are destined for grazing.
A number of emerging trends and conditions suggest it is time for expansion to begin. First, long-term demand forecasts for beef consumption are favorable. In light of the long biological cycle for the beef industry and current inventory trends, the industry cannot afford to wait much longer to stabilize and expand its inventory. The next two quarters will likely see downside pressure on market-cow prices due to liquidation in the dairy and swine industries, thus the incentive to liquidate is not supported from a price perspective. Good range and pasture conditions coupled with excellent feed availability appears to be supportive of expansion both through retention of more replacement heifers or from discouraging excessive culling in the short term. The overall economy remains a wild card and while the vast majority of forecasters are cautious with estimates about economic growth throughout most of 2010, they predict a much brighter outlook for 2011. Taken in total, modest expansion is a reasonable strategy this fall.
Finally, from a longer term perspective, if beef producers continue to reduce the size of the breeding herd then the industry may see a sizeable portion of the beef production and supply chain infrastructure become idle. If an additional 800,000 to 1,500,000 head of feedyard capacity goes empty, then the processing sector is sure to downsize as well. Once that happens, the industry is faced with the possibility that its future growth will be restricted by a lack of capacity beyond the cow-calf enterprise and in light of the current regulatory climate; regaining lost capacity may be a crippling hurdle to future industry and success.