Beef supply is low, but there can always be a catch
Update: In the nearly two months since this was written, dry conditions shifted into abnormally dry, then to slight and moderate drought throughout MFA's trade territory. And the rain has still not come, so comparissons with 1988 have become the currency of the coffee shop. This week (second week of July), USDA punted on last month's corn yield predictions pushing their number down to 146 bushels per acre. The grain trade reacted on the news (which wasn't news to anyone who has been bouncing around the corn belt this year), and beef prices are following suit.
It is hard to read much commentary on cattle without the reminder that total U.S. cattle inventory is at historic lows. “The smallest since 1952,” is the common refrain. According to my research, that means the average-aged cattle producer was one year old the last time the herd hovered around 90 million head.
Watching prices these past few seasons, it’s clear that low supply is pushing the bottom line in a positive way for producers. If you follow Ron Plain on the market pages in this magazine, you’ll see that the contraction in beef numbers doesn’t seem to be making a quick rebound either, which should continue to support stronger prices for beef. In other words, we’re riding on the sweet side of the beef cycle, if only for a few more years.
Yet the sage and worn-wise beef producer is quick to remind scribblers like me that beef market numbers have strong reality checks in corn markets and weather. And last year in Texas, it didn’t matter what the beef market was doing; it was drought that moved beef.
Listen long enough and you’ll begin to think that W.B. Yeats had been talking as much to a cattleman as an Irishmen when he wrote “he had an abiding sense of tragedy, which sustained him through temporary periods of joy.”
Just what bits of tragedy could sustain us through this year’s temporary period of low-supply joy? As of this writing, top of the list is lack of rain. While Today’s Farmer country isn’t at risk for a Texas-style disaster of the past few years, hay was reported to be short in south Missouri and Arkansas by the first part of summer.
Good spring moisture in northern parts of the territory meant a healthy hay harvest, but with some southern herds dipping into the hay ring in early summer, demand for hay could well keep prices high.
On a larger and more systemic level, predictions of a drought-stunted corn harvest could be another scenario that dampens beef producers’ returns from high beef prices. At press time, corn continued to suffer for lack of rain in the MFA trade territory. There was an extended stretch of dry weather on the horizon. MFA Health Track director Mike John has a canned and repeated remark when you ask how things are going in the beef industry. He says, “The cow/calf market is always vulnerable to corn prices.”
John told me that after hay, corn price was his one of his concerns for the marketing year. “Enough rain to get the early corn projections in the bin will really save us,” he said. If the rain won’t turn on, though, and the harvest looks shorter than predicted, the bottom line for cattle dips in concert with the up trend for corn.
And then there are the “black swan” events that might tip demand. Think lean finely textured beef and BSE. As Dr. Ron Plain has pointed out ever since low supply levels took over the forecaster’s report, a general downturn in the economy will dampen prices. As we prepared this magazine, markets were reacting to continued dreary economic news from Europe. Worries over Greece and Spain pushed the Euro down against a rising dollar. One of strength of our recent robust cattle prices has been export demand, thanks in part to a weaker dollar.
Interestingly, should events that develop a less-than-rosy outlook for the near-term beef market occur, it just might prolong the cycle. With replacement heifers bouncing around $1.40 for a seven-weight, how many producers will pass on the sure $1,000 in pocket compared to spending another $600 to $800 getting her ready to breed? Not too many folks from Texas. Rains brought some optimism, but a return to drier weather down there has folks thinking twice. If there is one place where people understand that opportunity costs and risk are real things, it’s Texas cattle country with last year fresh in mind.
When I told John that the average-aged producer was a year old last time the beef supply had been so low, he smiled and said, “That’s the thing. We can see why there is fear of higher input costs for the cattle producer, but there is a lot of opportunity out there. That’s why I’ve been saying it pays to get some weight on cattle post weaning. You’ve got to cover the costs that it takes to keep a cow around for the year, and at these prices, you can do it and put some in the bank.”
Money in the bank prolongs joy, even if it is temporary.