Record profits in the cattle sector in 2014 have motivated herd expansion, but producers are also now operating with higher risks.
Staying profitable through the expansion is a common concern, a concern Cattlefax shed some light on in a Jan. 21 webinar.
The beef production sector, from cow-calf producers to packers, realized a combined record-high profit of $1,100 per head in 2014, capturing a higher percentage of the retail dollar than ever before, said Lance Zimmerman, Cattlefax analyst.
Cow-calf producers pulled in profits of $550 per cow and set the stage for herd expansion. Beef supplies are still tight, but a repeat of 2014 isn’t realistic, given production increases of pork and poultry, he said.
“The good times are still here for a while longer. We’re still going to see very exceptional prices whether you’re talking about the calf market, feeder cattle market or fed cattle markets,” he said.
The question now is one of preserving profitable levels while pursuing herd expansion, and there are several things to consider, he said.
Cattlefax is expecting the national beef cow inventory to have gained 400,000 to 500,000 head in 2014 and is expecting close to a million head to be added in both 2015 and 2016. More important than the total supply, however, is getting through expansion profitably, Zimmerman said.
That discussion starts with bred cow prices, which ended 2014 at an average $2,500 per head, and it’s not out of the realm of possibility to expect the price to strengthen to $2,600 to $2,900 a head over the next three months, he said.
The logical question is whether that’s too much to be spending on a bred female, he said.
The price of bred females is dictated by the price received for calves. Year in and year out, producers can expect it to take 1-1/2 calves to pay for a bred cow. During expansion years, that increases to 1.6 calves, he said.
Expecting an annual average calf price of $260 per hundredweight in 2015 translates to an average annual price of $2,400 per bred female — which could very easily be too low in the current market, he said.
Looking ahead, prices will fall as supply increases. The most aggressive prices for bred females will be at the start of expansion, and it remains to be seen if the highest prices happened in 2014 or are still ahead, he said.
Regardless, current prices might have exceeded some producers’ risk appetite, and they might be better off delaying purchases until bred prices come down or scaling up their herd over multiple years, he said.
Another thing to consider is supply and demand dynamics. Cow-calf expansion during an environment of increasing beef demand hasn’t happened since the early 1970s, but there is that potential today, he said.
Given steady beef demand and even aggressive expansion to a cow herd of 33 million in 2020, the cow-calf sector could maintain profits of $240 per cow. Every 1 percent annual increase in beef demand would add $100 to that profit, he said.
“This very clearly shows us how important demand can be, especially increasing demand as we’re trying to increase our beef production capabilities,” he said.
Expansion might not be that aggressive, however, given the expense and risk at the cow-calf level, he said
Either way, the industry is in a long-term price range that’s going to make it “very profitable” to be in the cow-calf sector, stocker sector and even feed yard sector, he said.
Expansion in the cow-calf sector won’t be a one-size-fits-all approach. Some operators will buy bred females, some will develop heifers for breeding within their own herd and others will buy heifers to develop rather than segmenting females out of their own herd, he said.
Whatever the strategy, there is one thing that reigns true in all the economic data, he said.
“The low-cost operator that always keeps his production targets and goals in mind always seems to find more success in the long run, being more profitable by focusing on his cost,” he said.