Beef producers will need to watch costs with market downturnWritten by Gayle Smith
Torrington – Producers may need to pinch pennies once again if they hope to remain profitable in the cattle business. According to Bridger Feuz, a livestock marketing specialist at the University of Wyoming, the beef industry is undergoing a downward trend in the market that could last a few years.
With a decline in exports and domestic per capita consumption, the record high prices producers have enjoyed during the last few years are a thing of the past.
Feuz said fundamentals would indicate price levels at or near $165 per hundredweight for 500-pound calves this fall, which is around $800 a head. He anticipates fat cattle in the $125 per hundredweight range.
Referring to a graph of break-even prices for feedlot producers, Feuz says there have only been a few months of positive returns for cattle feeders since 2007.
“Feedlots have really been hurting for the last couple years, but during the last few months, they are almost back to break-even,” he explained.
Last year was particularly hard on cattle feeders. When prices started a downward trend, feeders held onto fat cattle too long, hoping for price improvements. It caused a glut of very heavy, overfed cattle in the feedlot last fall into the winter. Those overfed cattle finally went to market during the winter months putting the market back in balance, Feuz explained.
“The packer chain is now set up to handle carcasses as big as 1,050 pounds,” he said.
Interestingly enough, the average beef carcass averaged 625 pounds in 1960. By 2010, the average had increased to 825 pounds.
Since then, Feuz said it has increased three percent and now averages 883 pounds.
“I think that brings up the question of whether producers can efficiently run that big of a cow,” he said.
According to USDA numbers, ranchers are beginning to rebuild the declining cowherd.
In January 2015, they retained 3.3 percent more heifers, although July 1 numbers showed an increase of 6.7 percent. With the price decline in 2015, Feuz said ranchers may have decided to breed more heifers instead of placing them in the feedlot.
In 2016, cattle inventory numbers were up 3.5 percent on Jan. 1, and the calf crop had increased 2.3 percent.
Despite the increase in numbers, Feuz said producers have done a good job of becoming more efficient with less head. However, he cautioned producers about growing too fast, or overpaying for replacements.
“Even if the market stays flat or increases just a little, I still think most producers are still overpaying for cows,” he said.
Declining exports have also played an important role in the price decline.
In 2015, the exchange rate changed a lot more than what was anticipated, and because of it, the U.S. lost some key export customers.
“Japan and Mexico were really starting to come back from the BSE (bovine spongiform encephalopathy) incident,” he explained.
“Then the exchange rate increased, so that flattened and declined the export market to these countries,” he said. “The export market is the key for price support.”
Domestically, per capita consumption of beef has steadily declined since 1992. Meanwhile, pork has remained steady, and chicken has steadily increased.
However, as Feuz reminded producers, “Demand is a function of what we eat and how much we are wiling to pay for it.”
While consumers are eating less beef, they are paying more for what they do eat, he explained.
He sees this as a trend that could change direction in the future. From 1990 to 1998, the beef industry saw a decline in beef demand, but it changed directions and climbed upward from 1998 to 2004. During that period, the Atkins protein diet was gaining in popularity, and campaigns like “Beef – it’s what’s for dinner” started, as well as beef quality audits performed by the National Cattlemen’s Beef Association (NCBA).
Feuz said demand trended downward again from 2004 to 2010 and is climbing again since 2010.
“People are not turning away from beef, even though it costs more,” he explained.
Feuz recognized that retail beef prices challenge consumers, and because of higher prices, many consumers have shifted preferences toward middle cuts like flat iron steak, shoulder value cuts and hamburger.
“These markets are still growing,” he explained. “Consumption may be down, but demand is up.”