CattleFax: Opportunities available in the cattle markets

Laramie – With the number of cattle in the U.S. at just under 30 million head, and high beef demand, CattleFax market analyst Duane Lenz said, “There is a great opportunity in the cattle industry, but some risk as well.”
    In his presentation at the 2012 Agricultural Bankers Conference in Laramie on May 11, Lenz commented that the export markets and consumer demands play a large role in the industry, and the continuing increase in wealth of developing nations continues to bolster the industry.
Industry structure
    Cattle operations are seeing major changes, according to Lenz and many are increasing their numbers.    
    “In 1999, we had more operations that were less than 100 cattle,” he explained. “We have a lot more over 100 head now, and we are seeing smaller guys exiting the industry.”
    He also noted, however, that cows aren’t moving around, but rather the type of operation is changing. From 1970 to 2011, the percentage of cattle in each region of the country stayed nearly constant. However, the number of cattle on feed did change.
    “There is concentration in the feeding industry,” Lenz said. “Less than 200 feedyards marketed 50 percent of the cattle.”
    He noted that feedyards in Nebraska, Texas and Kansas are beginning to take off, whereas decline is seen in Iowa, Minnesota and Arizona.
    Lenz added, however, that a reshaping of the industry would likely begin to occur in the next several years.
Reshaping the industry
    “It takes about 2.5 turns of losses for the feedyards to say they aren’t going to pay for calves, and we are in our first turn of losses,” Lenz said. “So all the news will be pretty good today, but there are some factors that say we will start to reshape this industry.”
    He continued, noting that the transformation will likely begin with the packing sector, and the loss of at least one more packing house in the next 12 months is likely because cattle numbers are unable to support the facilities.
    “Then we will see a reduction in feedyard capacity with idle aisles or feedlots shutting down,” he said. “As this starts, remember what this means for your customers – there will be fewer people competing for your cattle and calves.”
    “Changes work backward all the time, starting with the consumer all the way to us,” Lenz said.
Concentration and
consumers
    “About 78,000 cow/calf producers have about 54 percent of the cows, and the next group of customers is the feedlots, and the top 26 companies have almost half of all the fed cattle marketed,” Lenz explained, emphasizing the funnel that is created. “Four major packers control 82 percent of cattle.”
    Following the packers, the top 10 retail chains control 70 percent of the market. He also added that retail is telling the beef industry what customers want and how much they are willing to pay.
    “Retailers have a lot of power in what we will produce as an industry over time,” he said, using the example of lean, finely textured beef. “If the customers don’t want it, it is out.”
    As far as what consumers are buying, Lenz said that consumers still want beef, but their interest in cuts has changed. Between 2006 and 2010, trimming prices increased by 20 percent, chuck by 26 percent and round cuts by 13 percent, whereas loin and rib cuts decreased or increased only slightly.
    “They want something that is lower priced that they can stretch,” said Lenz. “Consumers are staying with us right now, and we set a new record with what folks spent on beef last year. It is an $80 billion industry, and that’s a success story.”
    With that, he also added that demand is up about three percent so far this year. Per capita beef supply has been trending down, Lenz added. However, he commented that with demand, population growth and increasing exports figured into the equation, demand is still very good.
International marketplace
    The export market has provided a favorable avenue for U.S. beef products around the world, and Lenz noted, “We are still bullish in exports.”
    “From year to year, we import a lot more beef per weight than we export,” said Lenz. “If you put dollar signs on it, it’s different.”
    The U.S. imports primarily lean ground beef, and, in turn, exports whole muscle cuts. Because of the value of the dollar, Lenz explained that U.S. beef was actually cheaper than buying a lower quality product from places like Paraguay, which helped exports further.
    Though the value of U.S. currency is beginning to increase again, and exports are slowing slightly, he noted the market is still there.
    “Once you get consumers on beef, they don’t want it to go away,” he said, “but if the dollar really goes up we will lose some of that advantage.”
    The potential to open new export markets is also available, according to Lenz, who said, “We think we will get access to China in the next 12 to 16 months.”
    He also noted that the increasing affluence of citizens in developing countries creates higher demand.
    “Oil utilization and car sales are going up,” he said. “It all goes back to income and growth in their economies. The rest of the world is growing fast and catching up with us.”
    As consumers start to demand goods, such as cars, the value of hides and offal increases at the same rate, which is good for the industry.
    “We start seeing correlations between not just what people are eating, but how they live, and how it affects out industry,” commented Lenz.
    For the upcoming year, Lenz said CattleFax predicts feedlot profits to be down, but stocker/backgrounder operations and cow/calf producers to be in good shape.
    “We think feedlots will lose money this year, so if you are in the feedlot business, manage your risk and get those cattle hedged, even if it means taking a small loss,” commented Lenz. “Stocker/backgrounders are still positive, but will have narrow margins because of high calf prices, and cow/calf producers look to be in good shape with high, increasing prices.”
    Saige Albert is editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.

Feedyard capacity
    “One of the things we find fascinating and we think is a driver of the industry is how many cattle we can feed in the U.S.,” commented CattleFax market analyst Duane Lenz at the 2012 Agricultural Bankers Conference in Laramie on May 11. “In the ‘90s, we could feed about 11.5 million head, and we are up about 3 million from that.”
    With feedlot capacity high, and the overall cattle herd numbers down, Lenz said that the situation is good for the cow/calf industry.
    “It’s like staying at a hotel,” he said. “Empty rooms have overhead costs – they don’t get paid anything and they can lose money, so they are going to do everything to keeps the rooms full.”
    “We are seeing sharply smaller number of cows with calves, and feedlots have more capacity than ever before, and to keep those pens full they are starting to buy at fairly significant losses,” he added.
    At the same time, calves are entering feedlots younger and at heavier weights.
    “We think calf prices will stay pretty good, because feedlots are having to come to this group or younger to stay full,” Lenz said.