Opportunities exist as red meat, poultry industries head toward expansionWritten by Gayle Smith
Despite expansion in the red meat and poultry industries, opportunities still exist in the beef industry, according to Lance Zimmerman, an analyst with CattleFax.
“We’re forecasting an increase over this next year of two to three pounds per person for pork, two to three pounds per person for poultry and another decline for beef,” he said. “Beef has two strikes against it this year. Beef supplies are tighter, and there will be more competing meat suppliers.”
With the perfect storm in 2014, how did the beef industry get to the price environment they were at for supply, demand and leverage?
“Everyone talks about the cowherd being the smallest since the 1950s, but what they don’t realize is that even with a small cowherd, the beef produced from that herd was 2.6 times the level it was in the 1950s. In fact, there were a few weeks last year when steer carcasses averaged 900 pounds,” Zimmerman said.
As the expansion environment moves forward, producers need to recognize the expectation of prices going even higher in 2015 is not very realistic.
What has happened, according to Zimmerman, is that 2014 prices carved out a new range of what producers will operate in during the next two to three years.
“We shifted the supply curve for beef – but also for pork and poultry,” Zimmerman explained. “People consumed less beef but paid more for what they did consume.”
“Every year since the recession, demand has increased, but supply has dropped. It is likely we will increase supply as we increase cowherd numbers, but we may also have an opportunity to increase demand,” he said.
Producers need to consider leverage, which Zimmerman encourages them to think of as margin, when making management decisions.
On average, everyone gets just enough leverage to break even, he said. Tighter supplies stimulate a price increase in the retail case. So if the retailer wants extra beef, and the packer has extra shackle space, they bid more from the feeder operator.
The feeder operates their yard like a motel, so they want no empty bunk space. Their motivation is to increase efficiency. The more cattle they have in feedyard, the faster they can pay off improvements like their feed mill, concrete and metal. They bid more for stockers and lean calves.
“That’s how we create the environment where the guy holding all the cards wins,” Zimmerman explained.
“As we increase supplies in this marketplace, eventually we are going to see leverage escape the guy holding all the cards,” he continued. “In 2015, the cow/calf guy will still hold the cards compared to other entities. But, the feeder and packer may start saying enough is enough.”
A look forward
Regardless, Zimmerman expects calf prices to remain in the $2.55 to $2.60 range this year.
“It is a well-defined trading range. Prices don’t move $10 a hundredweight anymore, it is more like $50 per hundredweight in the calf market.”
Drought has affected regions of the country during the last several years, but every segment of the cattle industry suffered from the ethanol boom, Zimmerman said.
“The entire livestock protein industry had to readjust their supply curve when corn prices went up,” he said.
Now the beef industry has joined the pork and poultry industries toward herd expansion. Zimmerman thinks demand will begin to increase.
With 3 billion people expected to be added to the world population just in the first part of this century, the world is experiencing a growing income base.
“The U.S. produces the best beef available to this growing population. We currently export 11 percent of our production, but we could export even more,” he said. “The younger generation is eating the best quality beef ever produced in terms of tenderness, flavor and convenience. The consumer has more money to spend, and a hamburger is our equivalent to the chicken breast.”