Risk management important to cattle industry in coming years
By Jennifer Carrico
Lance Zimmerman, an analyst with CattleFax, told attendees to the Iowa Cattlemen’s Association convention that many emotions have been covered over the past year regarding the cattle market.
A considerable change in cattle prices has been seen from a year ago. Steers weighing 550 pounds are selling at $142 per head more than a year ago. Steers weighing 750 pounds are selling at $163 per head more than a year ago. Fed cattle have also increased $39 per head and cull cows have increased as much as $52 per head. However, the price of corn has decreased dramatically and the price of hay has even seen a decrease.
Zimmerman said the increase in U.S. beef replacement heifers is expected to be 140,000 head for 2014 and another 250,000 head increase in 2015. The increase in the cowherd is needed to help bring the inventory back up from a recent low.
The U.S. beef cow cull rate appears to be decreasing from the 2011 peak. This decrease is expected to continue over the next few years.
“The beef cow inventory is still going to show a decrease for 2014, because of more than one reason including the South Dakota blizzard, but by 2015 an increase should be seen again,” he said.
With the increase in retained heifers over the next few years, the steer and heifer slaughter will see a decrease until the cowherd is rebuilt.
U.S. beef exports continue to increase. An increase in income worldwide has led to an increase in demand for meat. U.S. per capita meat consumption has seen an increase in poultry and turkey consumption and a decrease in beef and pork consumption, therefore more beef and pork continue to be exported.
“The 2013 retail beef demand is down 2.4 percent, wholesale beef demand is down 3.1 percent and fed cattle demand is down 3.3 percent,” Zimmerman said. “Consumers will have to be willing to pay for beef if they want to eat it.”
While exports of U.S. meat continue to increase, it is still a small part of total production. Beef exports total 10 percent of production, pork exports total 22 percent of production and chicken and broiler exports total 20 percent of production.
Japan gets the most U.S. beef exports, followed by Canada and Hong Kong.
“We will see many price influencers for 2014. Cattle and beef supplies will be tighter, while the beef cowherd expands,” he said.
A smaller per capita net beef supply will continue for the next two or three years until the economy recovers. A larger competing meat supply will also be a limiting factor for domestic beef demand.
The tighter beef supplies will be favorable for feeder cattle prices, which are expected to increase for 2014. Fed cattle prices are also expected to see increases.
Zimmerman said the profit outlook for cow-calf producers should be historically strong for the next three to four years as long as drought conditions subside and feed supplies are replenished.
“Producers who find a way to manage production costs, while adding efficiency and quality, will gain the most,” he said. “And marketing will be increasingly important. Cow-calf producers will have to show buyers the value of purchasing their animals.”
The stocker and backgrounding producers will also see profits for the next few years. There will be increased competition for calves with cheaper feedyard cost of gains, especially if the 2014 corn crop is historically large.
He said these producers will need to have a good risk management to find affordable grassland to raise these calves on.
“Backgrounders will need to maintain an adequate feed inventory in case drought conditions persist,” he said.
Cattle feeders will also need to manage risk and volatility in order to stay economically viable in 2014 and 2015.
“Cost of gains have broken below $1 per pound, but the value is being bid back in to the feeder cattle and calves. Risk in this are is over managing corn position,” he said. “Managing cattle inventory will be essential going forward to keep from bidding away margins. Going forward, those who know how to manage risk will be in the driver’s seat in the cattle industry,” he said. “Using forward contract, basis contract and formula pricing will help these people stay ahead of the game.”
Cost of gains have broke considerable, but he said producers have had to hyper manage the corn prices considerably to make sure they can stay on top of the drastic changes in these prices. He suggested using constraint to prevent over-management of the prices in the future.
Jennifer Carrico can be reached by phone at 515-833-2120 or by email at email@example.com.