Economic factors CattleFax highlights purchasing opportunities
Cowherd expansion discussions continue across the U.S. and CattleFax Analyst Lance Zimmerman said the discussion has been riddled with concern, as well as opportunity.
“One of the concerns we hear is that people are enjoying record high profitability, why would the industry want to overdo the expansion mentality, oversupply the market and see prices drop?” said Zimmerman. “A lot of this discussion hinges on the cow cycle.”
Zimmerman was one of a series of speakers during a CattleFax Trends+ Webinar on June 11.
In the early 1980s and mid-1990s, the cattle cycle was in its full strength, said Zimmerman.
“We’d see high prices occur as supplies dwindled off,” explained Zimmerman. “We’d be motivated to expand herds from a financial standpoint and build up those herds. Higher supplies would bring lower prices, and we’d go through a contraction phase.”
However, he said this time, the beef industry is very different, and CattleFax sees a number of factors that will allow the industry to endure aggressive expansion.
“From 2012-14, we saw a loss of 1 million head, as we went from 30 million head to 29 million head,” Zimmerman explained. “It is difficult to see us adding back that 1 million head in a period sooner than five years.”
Between incredible capital investments and lack of momentum to rebuild, coupled with feed availability and weather concerns, Zimmerman forecasted that it will be a slow, methodical expansion as opposed to rapid.
“Producers can take to heart that prices will sustain themselves over a longer haul,” he said. “Our demand levels, with year-over-year increases, are going to be able to support expansion as we build back numbers.”
Knowing that expansion is imminent, Zimmerman commented that those states that saw the greatest declines in cowherd numbers, including Texas, Nebraska and Tennessee through the Central Plains, have potential for robust expansion.
“Every one of those states is in the top 15 total cow numbers from a state-by-state perspective,” he said. “We are looking at 42 percent of the total U.S. cowherd.”
He noted that Texas, as well as a number of other big players, will have a hand in expansion.
Many producers interested in expansion are concerned with the question of high prices.
“With record high calf prices, record high beef prices and everything in between, the bred cow market – whether we are looking at cows, heifers or pairs – won’t be a market that is cheap,” Zimmerman commented.
Seasonality will also affect the price of bred animals.
“The question we have to ask is, is a $2,000 cow too expensive?” Zimmerman said. “A lot of us haven’t had the opportunity to think about what a reasonable price for a bred cow is.”
Cost of cows
The rule of thumb that has been followed for many years, said Zimmerman, is that 1.5 calf crops should pay for a cow.
“During expansion or stabilization years, that number creeps up higher than 1.5 to 1.65,” he said, “and during a contraction phase, that can dip as low as 1.4.”
With a benchmark of 1.5 calf crops to pay for a cow in mind, Zimmerman noted that the price for a 550-pound calf will practically fall in the $220 to $230 range this year.
“If we assume the average ratio of 1.5, that suggests we are sitting somewhere between $1,800 and $1,900 for an average quality U.S. cow,” said Zimmerman. “In some of those critical expansion areas in Texas and Kansas, east to Georgia, replacements are going to be more expensive.”
Elite, top-of-the-line genetics are also going to cost a premium in replacements.
“If we see a six percent increase in the coming year, we are talking about scenarios where we will pay $2,100 for a bred cow,” he said.
“We have to keep in perspective that, just as we’ve had to change the paradigm we operate under when it comes to selling calves, we have to change our perspective when we think about what a bred cow is worth,” Zimmerman added.
Producers also have the opportunity to choose between bred cows, heifers or pairs when looking toward expansion.
“On average, pairs bring 14.5 to 15 percent higher prices than the price of a bred cow,” said Zimmerman. “There is also a decent seasonal component to that average.”
Looking at how that premium impacts prices, Zimmerman noted that producers should expect to pay between $230 and $300 more to buy a pair as compared to a bred cow.
There are a number of factors to consider in deciding whether to purchase pairs or bred cows.
“Purchasing pairs doesn’t involve the gamble of if a cow loses her calf or other factors that we might have to gamble on,” he said. “In some ways, the opportunity to buy pairs is a no-brainer for people. Other producers might see it as a challenge.”
Bred cows and heifers, on the other hand, also offer benefits and discounts to each operation.
“There is opportunities to buy heifers in the bred heifer market at a 1.5 percent discount, but is the discount worth it to add the younger females to the operation?” he asked. “The advantage for bred heifers is younger animal and hopefully better genetics.”
Each decision, however, is impacted by the specific operation.
Zimmerman noted, “It is up to each operation to make those decisions on their own.”