John Maday  |   November 21, 2011

During last week’s 40^th anniversary event at Decatur County Feedyard, Cattle Fax CEO Randy Blach presented a bright but bumpy outlook for cow-calf producers.

With beef demand likely outpacing supplies for the foreseeable future, cow-calf producers have unprecedented opportunities amid high production costs and continued market volatility. “We haven’t seen anything yet,” Blach says with regard to cattle prices.

Beef production will decline further before it begins to increase, he explains. While the market signals are in place for herd expansion, high production costs and especially drought in the South have brought continued contraction. Blach says U.S. cow numbers are likely to decline by another 500,000 head in 2012 and 130,000 in 2013. Steer and heifer slaughter will decline by 200,000 head this year, 300,000 in 2012 and 600,000 in 2013. The 2013 figure is based on an assumption that producers will begin retaining heifers, but just enough to stabilize herd numbers. If expansion picks up, fed-cattle slaughter will decline even further as more heifers remain in breeding herds rather than shipping to feedyards.

As a result of these trends, Cattle Fax expects U.S. beef production to decline by 275 million pounds in 2012 and 675 million pounds in 2013.

At the same time, we are exporting three pounds more beef per capita than we were in 2009. Blach says each tenth of a pound reduction in net per-capita beef supply translates to an additional $1 per hundredweight for the value of fed cattle. And per-capita beef supplies are going to shrink for several more years.

The United States remains the world’s top beef producer, and our exports continue to grow. This year, we will export 11 percent of total production, compared with 5 percent in 1990. Pork exports will account for 22 percent of production and broilers 19 percent, compared with 2 percent and 6 percent respectively in 1990. Hide and offal values currently add about $170 to the value of every finished steer, compared with a low of $74 in 2008 when recession impacted international demand. In total, beef exports this year are adding about $260 per head to the value of finished cattle.

The Choice-Select spread, currently running around $18 to $20, is at historic highs. One reason is Wal-Mart’s decision this year to feature Choice beef. Blach expects the spread to remain high, increasing the value of genetic selection and management practices that favor production of high-quality beef.

Next year, Cattle Fax projects fed cattle to average in the low $120s, with prices ranging from $110 to the mid $130s per hundredweight over the course of the year. Prices for calves and feeder cattle will increase proportionally.

That wide range illustrates the ongoing trend for volatility in the markets. Blach says the average daily range in fed-cattle futures has averaged $1.35, compared with $0.59 in 1990 and $0.90 in 2010. Week-to-week variations in corn prices have affected cost of gain by at least $20 per head about 40 percent of the time this year, Blach says. Corn prices are likely to stabilize somewhat next year with prices ranging from $5 to $6.50 per bushel.

High cattle values also have pressured producer credit needs, as a 20-percent equity position in feedyard cattle currently adds up to about $300 per head. It takes about 37 percent more capital or credit for cattle feeders to operate in 2011 than it did in 2009, and futures trends suggest it will take another 12 percent next year.

These challenges require planning and risk management, but overall Blach says the market in coming years offers tremendous opportunities for cow-calf producers to improve herd genetics while expanding their breeding herds to meet growing demand for feeder cattle at top prices.