Robb: Market peak is over, cow/calf producers can still make moneyWritten by Gayle Smith
Greeley, Colo. – Despite rising production costs and a falling cattle market, there is still money to be made in the cow/calf market.
“It takes more capital than ever to be in the cattle business, but the returns have never been better,” according to the senior agricultural economist of the Livestock Marketing Information Center.
Jim Robb spoke to cattle producers during the Colorado Farm Show, recently.
The recent past
Estimated returns for cow/calf producers were a record $500 per cow in 2014 and $300 in 2015. Based on his current estimates, Robb said producers may still make an estimated $200 per cow in 2016.
“With another year of good cow/calf returns, I would encourage producers to make a plan how to position their operations for the next five years,” he said.
“If we are going to be in the cattle business, we better love it because we could probably be making more money and get a better return on our assets someplace else,” Robb stated.
“However, we should be able to cover our entire economical cost of production, and our return on assets is definitely better than the stock market,” he added.
Looking at 2016
The key drivers in 2016 will be cash costs of production and pasture rent. Annual cow/calf costs have increased from $300 in 1986 to $550 in 2006, when the ethanol boom was occurring. This year that cost is expected to approach $900.
“This cost will shape the industry for the next several years as to who comes back in to the cow/calf industry,” Robb said.
Most of the increasing cow costs can be attributed to pasture rent, which has increased more than $100 in the last few years.
“Producers are going to have to become more and more effective in managing this limited resource and find ways to produce more and more,” he explained.
Management is key, Robb added.
“Producers are going to have to really manage their pastures by getting rid of noxious weeds to get more productivity,” he said. “Many people are not going to come into this business at $900 per cow that were in this business prior to the drought.”
Robb sees 2016 as a year of transition.
“There are more cattle behind us, and we’re placing less,” he said of the fat cattle market. “Prices will be under more pressure in the second half of 2016 when fed cattle prices feed back into calves and yearlings.”
The biggest part of that adjustment has already happened, Robb said, but producers can still expect lower prices. It will just be at a slower pace, he noted.
Southern Plains calf prices are projected to be just below two dollars a pound this year, which is still above 2013 prices.
The economist encouraged producers to keep a close eye on the cattle markets and the U.S. economy to determine the best time to sell.
“Fed cattle prices may be lower in the fourth quarter this year and could be at their lowest point of the year,” he said, while also projecting prices to be plus or minus $10 per hundredweight in the fourth quarter.
Since most ranchers sell calves in the fourth quarter, they may experience lower calf prices.
Producers should know their cost of production so they can determine whether or not to take early bids.
“Holding calves is probably not going to be profitable this year,” Robb said. “It is important to build numbers, but make sure and pay attention to downdrafts in the market.”
Several things could impact the market, pushing calf prices down, including the U.S. economy, the domestic demand profile and whether or not the U.S. goes into a recession pushed by the world economy.
Producers should also be prepared to react quicker if there is a short corn crop, with building cow numbers.
“The fourth quarter of 2014 was the peak of the cattle market for cull cows, calves, yearlings and fed cattle,” Robb stressed. “Cattle prices could continue to erode through 2018, then they will hopefully stabilize to more normal seasonal price patterns.”
Robb said 2016 will not be a repeat of 2015. He sees the biggest potential price drops this year and volatility in heavy yearlings. Producers need to make a plan, use discipline and get price protection, he noted.