Extension by John RittenWritten by John Ritten
By John Ritten, UW Extension Economist
We won’t know for sure how the national herd has changed for another month or so, until the USDA releases its Jan. 1 inventory report, but many people are already forecasting a drop in the range of half a million head nationwide.
The 2012 calf crop is expected to be around 800,000 head smaller than the 2011 crop. Given the national impacts of the drought this year, we did not see the rebuilding many people felt was necessary to carry the herd forward.
Therefore, the newest expectations are that the calf crop in 2013 will be the smallest since 1942. While this may seem ideal for cow/calf producers, in that a shrinking supply usually leads to increased prices, the industry as a whole may suffer.
Not only are we low on calves, we appear to be nearing the end of available feeder imports from Mexico.
Over the last few years, decreased domestic supply of calves has been supplemented with increased Mexican cattle as liquidation was occurring south of the border due to their drought. It appears as though this year Mexico may send a record number of animals north, but that trend seems unable to continue into 2013. The Mexican herd has been depleted over the last few years, and expectations are for Mexico to begin rebuilding through increased heifer retention.
Even if Canada sends a few more placements our way – which may be difficult, given their herd numbers are historically small – all reports suggest that total imports will be at the lowest point in over a decade during 2013.
Problems for feeders
This looming lack of placements is a troubling problem for feeders. The November cattle on feed report shows that October had the lowest cattle placed on feed since the 1996. Even more troubling is the fact that it appears that many recent placements have been on the heavier side and will therefore move through the system faster, meaning feedlots will need to fill pens sooner. It will be difficult to continue to place animals in a timely manner.
It is expected that this shrinking supply of feeders will likely impact slaughter and, ultimately, beef production over the next two years. It is unknown what impact a further restriction in beef will have on retail prices and consumer consumption. Any potential increases in retail prices is not great news, considering beef demand was reported to have dropped by 0.3 percent domestically and 5.3 percent for exports this month.
The question everybody’s trying to answer is: What happens now? Unfortunately, that depends on a lot of unknowns.
All expectations are for cattle prices to remain strong in the coming years. However, there may not be a big upswing in prices early next year unless parts of the nation see some moisture. I fully expect the national herd to begin to rebuild, but when and where will be dependent mainly on where the grass shows up. We may not see large increases in national numbers for a few years.
However, if the southern plains see some rain, we may begin to see large numbers of cattle heading south. Over 1 million head left the Texas/Oklahoma region in 2011, and when they are able to graze again, producers may begin to restock rapidly. Any demand for cattle in the spring may lead to an increase in prices in the first half of the year.
If not, don’t expect a large increase in prices unless a large grain crop is realized later in the year. And remember, large numbers of acres planted does not translate into a record crop. A year ago, all forecasts pointed to a record corn crop this year, but nature decided against it. Therefore, feeders will be unlikely to aggressively bid for cattle until they are more confident that feed prices will abate somewhat, probably in the third quarter.
Even if drought conditions continue over a wide area, prices should be supported by the tight supply of cattle, although we may not see the record prices many producers are hoping for.
In conclusion, the tight cattle numbers should maintain promising cattle prices. However, extended drought may prolong the rebuilding effort, yet I am confident the herd will grow over the coming years.
There are a lot of variables that can impact prices though. A strong grain crop will strengthen cattle prices, although probably not until the second half of the year. Any sort of disease outbreak will have a very detrimental impact on prices, especially if any export markets are closed. Any slow down of the domestic, or global, economy will likely impact the amount of money people are able to spend on beef, impacting profitability of the entire industry. And, we may see some restructuring of the industry as a whole in the coming years through vertical integration or increased consolidation as feeders and packers try to deal with decreased production. It is uncertain how this sort of structural shift will impact markets going forward. It could very well be the case that feedlots begin to demand heavier animals, especially if grain prices don’t ease. Even if we have a record corn crop, there are some estimates that a lot of the increased production will end up in the export markets.
So, about the only certainty is uncertainty. It may be a bumpy ride, but producers who adapt should do relatively well. I would expect prices to be quite variable in the coming months and years. Any reports of rain or good crop progress should push prices higher, while opposite reports would drive them down. Now might be a good time to hone your marketing skills, as some forward contracting might be able to reduce some of the market risk.
Also, there is no guarantee we are done with the drought. Given prices are fairly strong, now would be a good time to make sure your culling was deep enough this year; you don’t want to do long term damage to your forage in the next year just to chase high prices. There may very well be some opportunities to sell pairs in the spring/summer, which could bring record prices and ease the pressure on your on forage. Watch the winter/spring long-term forecasts, and plan accordingly.