CattleFax predicts profitability at banker’s conference
Casper – With the cattle industry in a buzz over expansion prospects, CattleFax Markets Analyst Troy Applehans said the cow/calf sector is expected to be extremely profitable moving into the next couple of years.
“Talk of expansion is a double-edged sword,” Applehans said. “If we expand too fast, prices will go down. If we don’t expand fast enough, we run the risk of not being able to fill orders for customers, so they go to alternate proteins.”
Applehans further predicted that, even if the herd expands to 30 or 31 million cows, cow/calf producers will still stay profitable.
“If we increase demand one to two percent per year, we can increase the number of head and stay extremely profitable,” he explained. “We want more dollars, and $200 to $250 per head is an extremely respectable margin.”
On Jan. 1 of this year, Applehans noted that the all fresh retail price for beef sat at $5.36. Coupled with a six to seven percent increase in demand, he said the prediction is unprecedented.
“Demand strength has influenced the market to stay strong on fed cattle prices, feeder cattle prices and calf prices,” he explained. “It is a very rare occurrence that all three of these segments are profitable.”
More typically, the cow/calf producers, said Applehans, are in the driver’s seat, leveraging the rest of the industry.
“Stocker operators have the chance to be profitable, but their margins could be thinner because of the price of calves,” he continued. “The feedyard sector is going to be as thin a margin business as it has been.”
“There is only so much margin per animal,” Applehans said. “There are five segments – the cow/calf, stocker, feedyard, packer and retailer – all trying to get as much of the margin per animals as they can.”
When looking at which segment has the most leverage in the industry, he explained that cow/calf producers, which produce the base product, calves, are best poised in the industry.
As supply continues to dwindle, cow/calf producers are best poised for continued profit.
Jan. 1 U.S. feeder cattle and calf supply was down 700,000 head, and April 1 numbers show a deficit of 975,000 head.
“This means we are utilizing a smaller supply at a quicker rate,” Applehans said. “We can’t do that forever. We are pulling the smaller supply into feed yards.”
A continuing reduction in cost of gain has resulted in more desire by feedyards to purchase calves, which leads to the question of whether feedyard supply will last into the summer and fall.
“Feedyards will bid all the profits out of cattle, so they can’t bridge a breakeven,” he commented. “That is good for cow/calf and stocker operators, and it shows the leverage they have in the market.”
Seasonality of markets
Though continued high prices are likely, Applehans said that risk management is still a necessary part of cattle operations.
“Risk is a scary word for cow/calf producers, but we are managing risk in an era of record-high prices and volatility,” he explained. “Some of our risk management is just in knowing the seasonality of markets.”
When looking at market fluctuation through the year, Applehans noted that the trend is consistent from year to year.
“If we know about the seasonality of our markets, we can get out of a lot of jams because they work 80 percent of the time,” he said.
“When we look at the October to November timeframe, that is when most calves are sold,” he said. “We would expect prices to be lowest at that time. Does it make any sense to sell them? We don’t have to sell calves just because they are moving off summer pasture.”
Rather, Applehans urged producers to consider selling cattle during summer video sales for October delivery to garner additional value.
“Eight of 10 years, cattle sold during the summer months for October delivery were higher priced than in the spot market in October,” he commented.
Applehans marked a 13 percent difference between market highs and lows through the year.
With current prices, he said, “We could have low $130s. We don’t feel like we will have to get that low, and we have very good support of the $135 to $136 area.”
“I believe that feeder cattle futures are going to go to $200,” Applehans predicted.
With bearish sentiment toward corn prices, coupled with competition in the marketplace, he noted that 750-pound steers will likely bring the high prices.
“Unless something happens drastically, I’m pretty sure the 750-pound steers will bring two bucks,” he commented.
CattleFax Markets Analyst Troy Applehans also emphasized the importance of knowing the breakeven price.
“A breakeven can be a difficult number for cow/calf producers to come up with,” he said. “It isn’t something we can spend 10 minutes on to generate a number. It takes a process, and we have to have records.”
Without breakeven data, it is harder to decide what prices are acceptable to sell.
“When we look at cow/calf returns from 1980 to 2000, we notice that basically, this is a breakeven business,” Applehans explained. “Since 2000, it has been much more prolific for profitability. We look at low-return producers, though, and they very rarely made money during that entire span. The high-return producer very rarely lost anything.”
The difference between the two, Applehans continued, is that high-return producers don’t cheat when it comes to nutrition, animal health or genetics.
U.S. beef cow slaughter is down by 105,000 head, or 9.6 percent, year to date, and CattleFax Markets Analyst Troy Applehans said, “We expected beef cows to be down 250,000 to 300,000 head. Heifer slaughter is indicative of people keeping back more replacements and trying to expand or stabilize the herd.”
Heifer retention is projected to cause a drop of 600,000 head for 2014 and an additional 100,000 head above that in 2015.
The result is the available 65 to 67 pounds of beef per capita dropping to only 54 pounds of beef available per person.
“This is a huge number in terms of the reduction that we’ve seen, Applehans noted. “There has been question of if we are going to price ourselves out of the market.”
However, the broiler and pork industries have facilitated continued market access with their similar increasing prices.
“Our export market is also going to remain strong and important,” he continued. “We have less supply, so we need to increase the price in ratio to the smaller supply.”