Growth in cattle numbers - CattleFax analyst urges caution in herd expansionWritten by Natasha Wheeler
As beef producers gear up for expansion, they should be cautious of a volatile cattle market, according to CattleFax. CattleFax Analyst Lance Zimmerman predicts a slow, methodical expansion of the cowherd, at least until 2020, but he encourages producers to carefully manage how they buy and expand the female portion of the herd.
“I think the low-cost operator who keeps production costs and goals in mind wins,” he said. “Producers need to ask themselves whether it is better to get bigger or get better.”
The beef industry needs to realize that they will probably never see 2014 profitability again, Zimmerman said.
“It was the perfect storm. We need to appreciate how robust that rally was from the start of last year to the end of last year. It was a once-in-a-lifetime event,” he explained.
In fact, U.S. cow/calf producers averaged $550 per head profit last year, stocker operators averaged $300 per head, and feeder operators averaged $200 per head.
“Regardless of what segment of the industry we looked at last year, there was record high profitability,” Zimmerman stated.
After a year like 2014, Zimmerman cautions producers the market isn’t likely to exceed those thresholds this year.
“I think we have some really good times ahead of us in the next five years, but we need to recognize that 2014 was a once-in-a-lifetime opportunity,” he explained. “We’re at the point now of maximum financial risk. That should signal to us a heightened sense of caution in the marketplace and encourage us to arm ourselves with enough data to make informed decisions.”
United States beef producers have the most potential they’ve had in the last 40 years to increase cow numbers during an increasing retail environment.
“It’s not a given, but that should encourage us when thinking about expansion,” he said.
However, Zimmerman cautions producers about expanding too quickly, especially at current bred cow and cow/calf pair prices.
“Buying a lot of females at $2,400 to $3,500 over the next year may not make a lot of sense,” he stated. “In a year or two, there will be an opportunity to buy those females cheaper. In 2015, the weatherman is predicting a wet cycle, but what if in 2016 it’s dry and we don’t have enough grass? We could have a huge loss if we have to sell those high-priced females.”
If producers plan to expand now, Zimmerman recommends doing it in increments over a five-year period. For instance, if a rancher wants to purchase an additional 100 head, he should only purchase 20 percent each year to limit his financial risk.
“It is important to buy those cows right so we can pay them off a little quicker,” he said.
If producers plan to expand right now, they need to ask themselves why, Zimmerman said.
“Do they have extra grass, do they want to diversify or bring extra family members into the operation? What if we expand ourselves right out of profitability?” he asked.
“We are never going to see cow numbers like we had in 1982,” he continued. “We would be selling ourselves short in the cow/calf industry, considering the production we see at the cow/calf level. It is completely reasonable that we could rebuild this cowherd to that low 30 million head level from a fed cowherd standpoint.”
Making it happen
Once a producer makes the decision to expand, should they buy replacements or develop their own?, asked Zimmerman.
“Retained ownership increases financial risk,” Zimmerman stated. “As an animal grows bigger, its asset value increases. If the market goes down, those animals could be worth less going forward over the next few years.”
“It would be a faster return on investment buying bred females in the fall. The return would be quicker,” he noted.
Stockman who choose to develop heifers may or may not get more genetic performance, Zimmerman continued. However, they would gain more flexibility in their program because those heifers can be marketed different ways.
Zimmerman said if a producer decides to develop their own heifers, he would encourage them to use a low input method, such at what the University of Nebraska suggests.
“I would make the first cut at 700 pounds and get rid of any heifers I didn’t want,” he said. “I would make the next cut of any heifers that are open and another cut of any that calve late. This method sets us up for very defined marketing windows.”