Zimmerman encourages producers to prepare for downturn of cattle marketWritten by Gayle Smith
Sterling, Colo. – While ranchers have ridden a high for several years of record-breaking prices, the cattle cycle has taken a down turn this year that may last for several years, according to a marketing analyst for CattleFax.
“The cattle cycle is not dead,” Lance Zimmerman told a group of 75 producers during the Northeast Colorado Livestock Symposium on Nov. 10. “It has always been there, it was just on pause for the last 15 years while we dealt with drought, trade volume and what has been happening with the grain markets.”
“We are likely facing a long-term, downtrend in cattle prices, which is typical of the cattle cycle,” Zimmerman continued, adding it could be two to three years before the market reaches the bottom.
It’s possible cattlemen may even deal with the downside of this cattle cycle into the next decade, he noted. However, the analyst said it’s possible by 2020 that there may be some renewed optimism based on new demand opportunities.
Emotions of the market
“Markets have a very real, emotional component to them,” Zimmerman expressed.
When prices were high, everyone wanted to be in the cattle business. But when prices plummeted in October, a lot of people decided this business wasn’t for them.
Zimmerman said cattlemen should have seen it coming nearly a year ago.
“In the fourth quarter of 2014 and the first quarter of 2015, producers should have been looking at the market and realizing this is an extreme high and those prices wouldn’t last forever,” he said.
At that point, producers should have been locking into some price protection to guarantee some equity in 2015.
“I think producers need to use the information available to them to make smart, informed decisions before the market turns,” Zimmerman told the group. “Use it as an opportunity to lock in profit, while everyone else is jumping ship. We may not have that opportunity again for several years.”
Looking at the markets in 2014, it was deemed a perfect storm because there was more demand for protein than supply. Cattle numbers were at record lows, and pork and poultry production were also down.
“What created that perfect storm in 2014 was a supply shortage across all segments of protein,” he said.
“In 2014, U.S. consumers were starving for protein,” Zimmerman continued. “We had the smallest per capita supply of protein in history. When there is a shortage like that, retail price increases so they can ration the available supply, assuming demand is increasing.”
The cattle cycle was also on pause while the country dealt with a devastating drought that lasted several years. While the drought affecting the West Coast has only impacted 12 percent of farm production, the drought that impacted the Central Plains to the Great Lakes region affected 85 percent of farm production and more than 80 percent of the U.S. cowherd.
In addition, ranchers were faced with skyrocketing corn prices upwards of eight dollars a bushel starting in 2006, thanks to ethanol production.
“From 2006 on, we had a two-fold problem facing the cattle market,” Zimmerman said. “In the short-term, everyone pulled back production, including cattle, pork and poultry.”
Now, poultry and pork producers have been able to ramp up production, but it will take the cattle industry several years to rebuild what has been lost.
“Looking at 2015 going forward, we are swimming upstream compared to other protein markets,” Zimmerman said, adding that there is still money to be made in the cattle business.
The 2014 prices trickled down to other segments within the beef industry.
The packer paid the feedyard more to ensure they had cattle to process, so their shackle space stayed full. The feedyard paid the calf producer more to keep their bunk space full.
“It’s the grower and the cow/calf guy driving the market. They have the factory, but everyone made money last year,” he said.
In 2014, cow/calf profitability was more than $500 a head, but Zimmerman thinks producers may still average $350 to $450 this year. Based on research, Zimmerman says five-weight calves may still average $250 per hundredweight, with 750-pound calves at $210 and fat cattle at $150 to $155.
However, he cautioned producers that these prices may work their way down until they reach the bottom of the cycle.
“Cattle expansion will also play a part in driving these prices downward,” he noted.
In fact, Zimmerman cautioned producers against expanding too quickly, particularly if they buy their replacements.
“Don’t buy $2,500 to $3,500 bred cows today because those will be the toughest to make pay their own way,” he said. “I would recommend buying a few more head each year. Don’t be afraid to spread it out.”
Realistically, Zimmerman said the U.S. could grow the cowherd to 33 million head by 2020. If that happens, the beef industry is going to have to pursue exporting more beef.
“The U.S. is just a small slice of the world population,” he explained.
Currently, this country only exports about 11 percent of its beef. Its protein counterparts, pork and poultry, export nearly twice as much.
“Beef has a huge opportunity to increase exports overseas in the future,” Zimmerman said.
If the world’s population increases to nine billion by 2050, beef will have a front row seat in feeding that market.