Published: May 06, 2008 12:32 pm            

Higher costs may force industry to downsize nation's cow herd

Escalating feed prices putting profit pinch on all segments

PARSONS, Kan. — There's more than one potential path to better beef prices but the most likely road is the one that leads to offering consumers fewer total pounds of product but at higher prices, according to James Mintert.

And that, the Kansas State University economist said, means the beef industry will contract—fewer cows and, probably, fewer cowboys.

Dramatic increases in production costs—led by record-high grain prices—have dished out economic hurt up and down the industry, particularly in the feeding sector, Mintert told cattlemen at last week's Beef Cattle and Forage Crops Field Day at the Southeast Agricultural Research Center near Mound Valley, Kan.

The other two paths to achieve the higher beef prices needed to keep up with higher costs are stronger domestic demand and stronger export demand, he said.

Strengthening domestic demand for beef, the economist asserted, is unlikely in the near-term. A weakening economy, Mintert noted, may have the reverse impact—a softening in beef demand as consumers struggle with other economic pressures.

Growth in the beef export market is far more likely, he said, but it will be difficult to gain enough of that market back to offset higher production costs. Mintert said Japan and South Korea are the keys to improving export demand and he called the reopening of the South Korean market "tremendous news" for the industry.

Exports to Japan, he said, are growing very slowly, primarily because of the age restriction on exports to Japan. Longer term, Mintert indicated that Japanese consumers heightened concerns about about food safety and a deep mistrust of the American product could continue to hold back U.S. beef exports, once the age restriction is lifted.

Increased costs are driving a continued reduction in the nation's cow herd, although the rate is still fairly slow, Mintert said.

According to K-State Farm Management numbers, total cow/calf production costs have risen about 25 percent since 2005 and will likely take a big jump this year as feed costs stand out as the 500-lb. gorilla in the room. Breakeven calf prices for 2008, figured against total costs, are in the $130 range.

Although returns to variable costs were still positive last year for the cow/calf sector, Mintert said, they were dramatically less than in 2005.

The result has been a 12 percent drop in U.S. beef cow numbers in 2006 and a 6 percent decrease in 2007. How much cow herd reduction occurs this year will be dictated by summer crop and pasture conditions.

In the feedlot, cost of gain has racheted up significantly while the prices paid for feeder cattle have not dropped enough to compensate, resulting in record losses for feeders.

And beef processors find themselves with too much capacity as cattle numbers, and their margins, decline.

In the past, high corn prices have tended to correct themselves. Short supplies led to higher prices and growers responded the following year with increased plantings and a return to normal yields which, ultimately, brought prices back down.

Now there's a totally different scenario at work as demand, especially for  ethanol, promises to maintain record corn prices for the foreseeable future and Mintert cautioned that any weather-related threats to this  year's corn crop could send prices much higher still.

"Historically, feed has always been the largest usage category for corn," Mintert pointed out. "In 2002, about 62 percent of the U.S. corn crop went to livestock feed and 11 percent went into ethanol.

"It's projected that in 2008, those numbers will change to about 46 percent for feed and 30 percent for ethanol and FAPRI (Food and Agricultural Policy Research Institute) is projecting that those two will cross over in the next few years.

"Even though we have the nation's second largest corn acreage projected for this year, corn ending stocks as a percentage of total usage is still expected to be less than 10 percent, based on trend-line yields. We've only gotten that low a couple of times before.

"So expect a lot of volatility in the market and keep in mind that any crop production problems will result in a significant increase in the corn price."

Faced with high-priced corn and an increasingly volatile corn market, Mintert suggested that the industry will need to manage feed costs more aggressively than ever before.

For this year, the economist said, smaller domestic beef supplies will support cattle prices somewhat. Additionally, he said, futures market prices have remained fairly high—"The futures market may be a  little more optimistic than I am about reducing beef supplies."

Mintert said he is expecting 700-800-lb. steers at Dodge City to average just shy of $105 for the year.

For more complete economic information, Mintert suggested that cattlemen check out beefbasis.com, which features cattle basis risk analysis tools, and K-State's ag economics website, agmanager.info.



Mark Parker writes for Farm Talk in Parsons, Kan.

        

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