Calf Prices Will Continue To Be High - But Will We Have Any To Sell?
John C. McKissick, Professor and Extension Economist, Agricultural and Applied Economics, The University of Georgia
The beef cattle price cycle has played out just about as expected. Cattle prices have moved into the $1.00 range (400-500 lb. calves) right on target but also right when the rain buckets went completely dry in Georgia. Most Georgia producers are having (or have had) to make serious cow culling or liquidation decisions. So the natural question is, how long will good prices last so you can decide how important it is to hold your cow herd together? And related, how much feed can you afford to buy to feed those cows?
While we expected calf prices to show real strength beginning 3 to 4 year after the lows of 1996, the real reason for the most recent strength has been somewhat unexpected. You see, after almost 20 years of evidence that consumers were turning away from beef, the last two and a half years have shown a resurgence in beef demand. For instance, last year we produced and consumed almost 2% more beef than in 1998, but sold it for a higher price. That's called an increase in demand. The numbers now show that beef demand, and in fact all red meat demand, has been improving since about 1997. While the reasoning for the demand reversal is still debatable, the evidence is clear that consumers like the higher quality cuts of beef even if they have to pay higher prices to get them. Combined with a continued strong export demand (Japan, Mexico, Canada and now Korea) the recipe for higher calf prices has now been spiked for even higher highs when beef supplies turn lower, as they surely will over the next few years.
After 6 years of increasing cattle numbers from 1990 to 1996, beef cow numbers have now been reduced below the levels we began the 90's. As the beef factory is reduced, beef supplies will ultimately be reduced. This is the cattle cycle in action. High prices lead ultimately to more cows, leading to higher beef production than can clear the market at profitable prices. Low prices then lead to beef cow reductions. The question I've had to answer a lot over the last year is, if cow numbers are low now, how come we got more beef. This is the paradox of the cattle cycle. As cattle numbers are liquidated, more females show up at the slaughter house further increasing beef supplies. This is precisely what has happened the last few years. While mature beef cow slaughter has dropped, heifers have been shipped to the feedlots in record numbers. From 1997 through the last cattle on feed report, the number of heifers on feed has averaged close to 40% of the total cattle on feed. By comparison, from 1992 to 1996, this number was never more than 36% and in most years around 33%. When US beef cattle producers start holding more heifers in order to build their cow numbers, beef supplies will drop significantly. Of course, in the long run, more cows will mean more beef. But this occurs only about 3 years after the start of the cow herd buildup.
One final factor of note deserves mention - grain prices. As anyone who's heard my spill over the last few years can tell you, every .10/bu change in the corn belt grain price will ultimately mean a change in the opposite direction of about $1.50/cwt. in Geogia prices for a 500 lb. feeder calf. As we began this crop year, major parts of the corn belt were dry. While large corn supplies were in the bin at the beginning of the year, a dry summer in the corn belt still held the threat of moving corn prices significantly higher. While the US corn crop is a long ways from made, the corn belt has had significant rainfall during the growing year to date. Thus the treat of a negative impact on calf prices from high corn prices seems to have resided, at least for this year.
So where does this all leave us? Well it leaves an economist with almost nothing to be pessimistic about - a professional no-no! Beef supplies will drop noticeably as cattlemen respond to higher prices by holding a few more heifers in the herds. This alone would argue for $1.00/lb. plus calf prices through about 2003. If beef demand remains strong and improves further, a good situation will have gotten that much better. I expect at least a $10/cwt. calf market gain per year through 2002. Of course a short corn crop in any of these years could take $10 to $15/cwt. out of the calf market, but that would still leave us with a fairly good price situation.
So, what does this mean for the Geogia producer who's long on cattle but short on pasture? Do everything to keep a good, productive cow herd together. Identify and cull open, old or unsound cows QUICKLY. Wean and sell calves early. Sell heifers that you would normally hold for replacements. And then and only then, consider selling some of the productive cow herd. Remember, that every cow in your current herd that has a high probability of producing a calf should be a money maker over the next three years- provided we get rain. But, you have to keep them productive. If you're going to keep them, feed them when they need it (lactating and particularly at breeding) and cut back when they are dry.
How much can you feed cows before it is uneconomical? As the cattle prices improve and cattlemen begin to rebuild their cow herds, the replacement market will reach its peak. I would guess a good , productive cow herd will fetch $100 to $150 more per cow over the next few years than today. So you can put this much feed into your current cows and be no worse off if you are going to continue in the cow business. What about going with heifers? Remember the timing of the cattle cycle. Heifers this year or next will only have one calf at best during the golden years of the cycle (up to 2003). So they are not a good restocking alternative at this point of the cycle and this is why I put them on the sell list before productive mature cows.
Hopefully, by the time you have read this you have received rain and the pastures are looking up. Then we can turn our attention to the marketing and management alternatives that will maximize returns during what should be the profit phase of this cattle cycle.
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