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CattleFax at NCBA: When to expand the herd

Published on 22 February 2011

In only two of the past 15 years has the U.S. cattle inventory actually increased over the previous year, raising the question – just when will the trend of fewer domestic cattle come to an end?

“We do think over the next 12 to 24 months, we will see liquidation stop as far as the domestic herd,” said Cattle Fax analyst Kevin Good, speaking to producers at the 2011 Outlook Seminar held Feb. 4 in Denver, Colorado during the National Cattlemen’s Beef Association annual convention.

“But to get that to rebound, we need to remember there’s other factors that have in impact on that producer’s decision to go ahead and expand,” he added.

Good said January 2011 data showed cow slaughter down 15 percent compared to a year before, and replacement heifer data also indicate some slower signs of liquidation. But it’s too early to tell if that’s a solid trend across the industry.

Good said producers in 2010 were “extremely current,” by pulling cattle forward into finishing, with weights that were light, and because of that producers had more leverage in trading cattle.

This year, given the big premiums built into the markets, Good said the market seems to be telling producers “to feed the cattle longer and go to bigger premiums” – mostly as a warning to keep optimism within reason.

“When you come into years like this when you have big premiums, the market tends to disappoint compared to those averages the futures are trading at. That’s not to say the market can’t average higher -- we think it’s going to be record high this year. But when the year is said and done, it’s probably going to be disappointing compared to where these futures are trading at.”

Breaking that down for each segment of the industry – Good said the market “is extremely explosive as we look at it from a price standpoint, especially for certain segments. For feedlots, a break-even is around $115 (per cwt). “How many times have you sold fed cattle at $115 or better? That makes risk management that much more important as we’re looking with the environment you’re in today.”

Stocker-backgrounder profits have been consistent over the past four to five years, Good said, but because they’re a margin operator new trends may evolve quickly.

“They’re going to see extremely high calf values, they’re going to be able to pass some of that on, but they still have high input costs.

“That very well could be where the margin squeeze occurs as well. Expect that segment of the industry’s margins to get narrower and narrower over the next couple of years.”

The cow-calf producer, however, is the one who’s in the driver seat, Good explained. If they can average $140 for a five-weight steer calf, the vast majority of producers will profit, he said.

“That begs the question on expansion as well, as you think about the next couple of years – that’s the segment we see the most equity returning back too.” end_mark