Cattle Industry Reboot

With his dusty boots and wide-brimmed hat, the American cattleman has an image as being stoic, steely-eyed and straight-faced. But even the toughest old drover out there can no longer stifle the occasional smile. Record calf prices and the green grass of spring have simply destroyed his long-bred defense against glee.

By all indications, the good times are here for at least two or three more seasons if you're a cow/calf producer. That's good news to third-generation cattleman Jay Wolf. His optimism for that side of his business set his path while his Nebraska Sandhills operation was still in the midst of drought in 2012 and 2013.

Wolf felt so strongly 2015 was going to be a good season that he dry-lotted 2-year-old bred heifers in 2013, along with his yearling heifers, in preparation for this hot market. He's actually increased numbers 20% during the past five years. He admits it has been a challenge.

"We survived the drought, and we knew that if we made it through, the market would reward us for hanging tough," said Wolf, based near Albion. "We are just very optimistic about the cow/calf side of our business right now."

DIVERSITY DELIVERS

Wolf's operation, Wagonhammer Cattle Co., is 115 years old and includes a 5,000-head feedyard, in addition to the 2,000-head commercial cow herd, a Charolais/Angus composite. The ranch is also known for its registered Angus bull sales. The goal, Wolf said, has always been to remain diversified. The strength of the cow/calf side this year, for example, is expected to offset the comparative lackluster performance at the private feedyard.

"We raise about 10% of what we feed out each year," Wolf said. "Right now, we are sitting on the sideline not buying. We don't see any profit potential in buying feeder cattle today. But opportunities will come along, and we will find some."

Wolf's comments reflect the malaise affecting feeders across the country. High feeder calf prices, averaging $202.82 per cwt in 2014, a ray of sunshine for cow/calf operators, have made profit margins slim, though not nonexistent, at feedlots.

At Wagonhammer, feeder calves are contracted in the summer and delivered in the fall. They are marketed in April, May and June. Wolf said they have the calves for about 220 days, during which time they'll put on 775 pounds, selling them at around 1,325 pounds.

"We know the feedyard side of the industry is going to struggle for a while as we fight over a limited number of feeders. We made some money in 2014, but right now, there is more money chasing cattle than there is sense," Wolf quipped.

EXPANSION WELL UNDERWAY

The big news early this year was the report by USDA that the U.S. beef cow herd increased 2.1% between January 2014 and January 2015 to 29.7 million head. While most pundits felt expansion was under way, few expected to see that big of a jump in the 2015 numbers.

Oklahoma's Derrell Peel admits some surprise at the projection, but he doesn't disagree with it.

"True, it was bigger than most people expected, including me," said the Oklahoma State University beef marketing specialist. "But I don't necessarily think this means the industry will see a big revision when economists look back at the numbers a year from now."

Part of the reason for the large increase is just how low herd numbers had dropped. Peel said the decline was beyond being part of the normal cattle cycle. Rather, it was something forced on the industry by Mother Nature.

"In 2011, we were at 31 million head of beef cows. I remember thinking then that we were ready to expand. We were through the worst of the recession, the market values were there, and then the drought hit, particularly in the Southern Plains. That forced additional liquidation. We lost another 1.9 million head from that point on, and you can lay it directly at the door of the drought."

Now, as the corner is turned, Peel believes the nation's beef cow herd is the youngest, most productive ever. That implies positive things for the future.

GAINING MOMENTUM

"I think we can afford to cut back on cow culling during this expansion cycle and push our numbers with the heifers in place. We should be able to grow faster than we normally could because of this herd. We may be able to maintain that 2% or even see a 3% level of growth for this year," he said.

Peel adds that relative to the number of beef cows, replacement heifers are at 19.5%. In the past, this number has never gone above 18.5%. In addition, net culling of the beef cow herd is now at 8.8%; the long-term average is 9.7%.

"When you're trying to expand, you cut back on culling, and that is what the industry has done collectively," he said. "Culling doesn't mean these cows made their way to packers. We are in an environment where one man's cull is another man's new cow."

Peel said for both 2015 and 2016, he is projecting 2% to 3% growth in the size of the cow herd. A lot of that growth will take place in three regions: the Southern Plains, the Great Lakes and the Midwest. Breaking it down to the state level, Kansas, Oklahoma and Texas will lead the way in expansion. This is largely due to the fact that these are areas that lost the most head as drought forced extensive culling and all-out herd liquidations. Interestingly, even in spite of drought on the West Coast, Peel said no liquidation was noted in California or Oregon in the most recent USDA report.

Of the heifers expected to calve for 2014 (a data subset of the replacement heifer inventory numbers), 96% wound up staying in the herd. This is well above the average of 85%. The number of heifers expected to calve that stay in the herd is a reflection of things like failure to deliver a live calf or other health issues. While Peel said he would not read too much into the higher percent staying in the herd for 2014, he believes it is certainly a reflection of how hard the industry is trying to expand and how valuable heifers are in this environment. He would expect this percent to back down to around 90% for 2015.

Oklahoma cattleman Russell Boles is a living example of the data. Based in the Southeast corner of the state, near Watson, he said the family ranch moved out of the cow/calf side of the business during the drought, sending cows and heifers north for grazing and then eventually selling them last spring. That left the operation strictly as a grass stocker business, but not for long.

About 100 young, open heifers will be delivered from south Texas this month to the ranch, and Boles said they will breed for a fall delivery. He added he's taking the opportunity to improve herd quality and build a cow with a more moderate frame for his drought-prone area.

"I don't want to go through a year like 2011 again with 1,300-pound cows. It's just not economically feasible," he said.

"We are going with a Red Angus, where before we were predominantly Black Angus with some Simmental. In this area, there is a lot of demand for red females, and we want to capture some of the replacement market."

OSU beef marketing specialist Peel said Boles' move to a more moderately sized cow is typical of the direction many cattlemen are taking as they rebuild their operations. He believes it will make ranches better able to carry their herds through challenging times, such as when forages supplies are stressed or feed prices spike.

NICHE MARKET CONNECTION

As composite retail beef prices have surpassed $6 per pound, the divide between traditionally grown and specialty beef seems to have narrowed in many cases. For February 2015, USDA reported direct-sale prices (FOB) for grass-fed ground beef averaged $8.09 per pound (90-10 bulk); retail for traditional ground beef (90-10 bulk) averaged $5.57.

This adds up to more opportunity, said niche beef producer Scott Cunningham. The Florida cattleman manages Cunningham Farms, a family business that includes Scott, Jimmy and Jacky. The operation produces "natural beef" with no antibiotic use and no hormones. Customers of the ranch buy quarters, halves or wholes at a hot-carcass weight price of $3.10 per pound. They pay for their own processing and freezing, about 63 cents per pound. Average weight for the steers is 1,250 to 1,350 pounds.

Cunningham said as retail beef prices have climbed, the business has also grown stronger. In some cases, he added, their beef is a little cheaper than retail.

"This is a market opportunity for anyone who wants to sell specialty-type beef," he said. The producer added that his beef prices were up 8% to 9% this past summer from year-ago levels. Traditional beef at retail was up 15% to 16%.

It all has Cunningham family members thinking they'd like to expand the operation by about 10% this year. That decision will be based on land resources, which are limited to about 170 acres.

In addition to end sales, the operation has seen strong demand for females and bulls. They are selling both open and bred replacements through the Alabama Beef Cattle Improvement Association's (BCIA) Herd Builder Replacement Female Sale, in Uniontown. Cunningham Farms runs about 50 cows and sells 20 to 25 females each year. Most often the heifers are open, but last year, they sold 15 open and six bred females. The open heifers, just 60 to 90 days postweaning, brought $1,800 each.

Asked if he considers this a good time for producers to start a niche beef business, Scott Cunningham said he believes there is real opportunity now, especially for someone who already has the land and fencing.

"I believe it's a good time to expand. I think there are a couple of good years left in this. But to start from scratch? It might be late for that. By the time a brand-new guy could start selling calves off of those nice bred heifers he buys, I'm not sure what the return on investment will be like. I say if you're going to get in, get in this year."

He explained that what happens at the farm level is eventually impacted by what happens around the world, and U.S. producers will not be the exception to that fact.

BEEF'S GLOBAL STAGE

At present, the country impacting U.S. beef supplies the most is likely Australia. Don Close, vice president for Rabo AgriFinance and Rabobank, St. Louis, Mo., said the Australian beef industry's challenges will continue to impact U.S. imports of beef, specifically beef used for ground, as well as U.S. exports.

"Australia had its largest slaughter of beef in over 35 years in 2013. Because of the drought there, liquidation has increased another 7% in 2014. Slaughter is expected to drop 14% in 2015 because of reduced cattle numbers. That means we'll see less lean beef coming to the states from Australia," Close said.

Last year, the country reported another 8 million head of cattle slaughtered, a number the magnitude of which Close said has not been seen for 35 years. The high numbers have pushed prices down, and with dry conditions forecast there for the summer, slaughter numbers are expected to remain high, continuing to pressure prices.

Contraction in cow herd numbers has also extended to Mexico and Canada, Close explained. The Canadian herd is reported at 3.92 million beef cows, 1% below year-ago levels. Mexican beef herd numbers also appear to be falling, but there is scarce official data to back up the anecdotal finding.

"Total imports of Mexican feeder cattle into the U.S. were up 9% in 2014," Close reported. He added that steer numbers for the country were up 8%, and heifers were up 22%. While Mexico shipped more feeder cattle to the states, he said they had to dip substantially deeper into their female supply to make it happen.

As a result, Close said the picture taken as a whole for North America makes a strong case for tight beef supplies for at least two years.

"The rebuilding of the cow herd in North America is going to take more time than a lot of the market is thinking about today," he said.

"In addition, we have a huge contraction [of] beef herds in Australia and New Zealand. South America is stable but slow. We can't collectively jump to the conclusion that South America will be able to make up the contraction, because they can't."

THE BIG PICTURE

Partially offsetting the loss in numbers, Close said, is the increase in carcass weights. In the U.S., the total number of cattle and calves stood at 93.9 million head in January 2010; beef cows were at 31.4 million. By 2015, those numbers had slid respectively to 89.8 and 29.7. Larger animals, however, meant that average cattle carcass weights (dressed) went from 761 pounds per head for 2010 to 821 pounds per head for the week ending March 7, 2015.

"When you look at that trend, you see total beef production has been stable, or in some cases even grown modestly," Close said. "Demand is driven by two factors: quantity and price. When you look at the quantity side, you see growth."

Consumers are also seeing a better quality product, Close adds. He said the total percent of cattle in the U.S. grading Choice and Prime is now more than 74%.

"We are already seeing the benefit of those genetic improvements producers have been making. And we are just starting to ramp up that total implementation of better genetics and technology. In all honesty, I think the outlook for agriculture is the brightest in my lifetime."

(VM/CZ)

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