Analyst tells producers not to expand – yetWritten by Gayle Smith
While the cattle industry is heading toward expansion, Steve Koontz, who is a professor of ag economics at Colorado State University (CSU), tells producers it is not the time to get into the business.
“I’m talking people out of buying heifers as much as I can,” he says. “We should do something else with our money the next two years because I think heifers will be cheaper in three years. If we do want to buy heifers and need 100 – buy 25.”
Koontz reflects on bred heifer prices that are now between $2,000 to $3,000 and may go even higher this year.
“When we work the budget, we need to consider how many years we want to work for nothing before we purchase a heifer,” he says. “Take that money out of the business and invest it into Vanguard or other resources.”
Feeder cattle market prices seem to be infinite, he continues. “What will feeder calves be worth? It’s whatever the industry folks want to pay. I have no idea what they will bring. 2014 was the perfect storm – a once in a lifetime thing,” he continues. “The factors influencing that market are different now.”
The economist thinks the cattle market may have reached its peak.
“With 90 percent lean hamburger at three dollars a pound, restaurants are now having a hard time showing a profit. They are compensating by serving other meats like pulled pork sandwiches,” Koontz explains. “Brazil may get more restaurant business in the U.S. because they can also produce lean hamburger, and they can do it cheaper.”
At some point, the industry will also need to address the increasing size of carcass weights. Koontz says packers are currently taking enormous cattle because they need inventory. However, it’s hurting domestic demand.
“Customers don’t really want to eat those gigantic ribeyes that are one-half-inch thick. Ultimately, it’s going to hurt us,” he emphasizes.
Since statistics show Americans eat one-half of their meals away from home, and those are prepared by someone else, the food service industry will be appointed the task of developing ways to utilize those oversized cuts of meat.
In the meantime, Koontz expects more pressure from the pork and poultry industries this year as they step up production.
“The strength of domestic demand kept beef prices up in 2014, and I haven’t seen them back off three dollar hamburger yet, but I think it’s coming,” he says. “The high price of beef is going to be pressured by pork and poultry. I expect to see the beef industry lose some of its market share to those meats this year.”
Beef prices in 2015 may also come down relative to the volume of pork that is produced and how much they can export out from under beef.
“We had very strong exports in 2011, but since then exports have been soft and haven’t shown any growth,” he notes.
“The beef market this year would be strengthened by international demand and trade, but I don’t think the dollar will let that happen this year. That is the news we will need to hear to see higher fed cattle prices,” he says.
Fed cattle prices have held strong because of domestic demand. Koontz is predicting a range of $1.45 to $1.65 this year.
“I think the fed cattle market will have lots of volatility in the first quarter until we figure out how high those record meat prices will go and what we can afford to pay for cattle so the packer can make a margin. The packer has been clobbered by this market since last fall,” he says.
There are indications that ranchers may be starting to expand. Beef cow slaughter is pretty light, Koontz says, and dairy cow slaughter is what has made up for the lean meat demand.
“Looking at beef cow numbers and heifer replacements, I think we will be hard pressed to expand the herd one percent this year,” he notes.