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2012 Holds a Mixed Bag for Cattle Feeders

17 February 2012

Feeding cattle had its high and low points of profitability last year, writes Shane Ellis, University of Illinois.

Based on the Iowa Estimated Returns, a barometer of economic profitability, finishing yearling cattle last year netted an average loss of $40/head. The brightest point of the year was during the spring when returns edged past $120/head profit for cattle sold in April. This short period of profitability was cut short by a combination of increasing feeder cattle and feed costs coupled with mundane fed cattle prices. Profitability hit a low point of a $180/head loss on cattle sold in September. Profitability returned for a fleeting moment in November when high quality beef cuts surged in value.

The choice-select price spread widened to more than $18/cwt. during October and November. This strong upsurge in beef prices made it difficult for retailers to feature beef cuts and still turn a profit. As a result the demand for beef has started out the year more like a lamb and less like the lion that many had anticipated a few months ago. Rather than continued strengthening of demand for beef in the coming year, a stable status quo is becoming more likely. At current prices, profit margins on retail beef sales are narrow at best, leaving incentive to increase sale volumes. For packers and feeders, the profitability situation is rather grey to start out the year, as neither sector is in a position to turn a profit at recent prices. Packers have been losing $35-45/head, on an operating basis, and they still have plenty of beef yet to sell. The choice-select spread has narrowed up to less than $10/cwt. as a strong supply of choice beef is getting ahead of demand. February and early March are usually when beef demand is at its weakest during the year, which leaves us with a continued bearish short-run cash market.


Figure 1. ISU Estimated Returns to Finishing Yearling Steers

Cattle that are currently on feed will likely to turn a modest profit, and as can be expected the cattle marketed in March through June will likely produce the largest returns for the year. Based on recent futures market prices, fed cattle may reach $130/cwt. during late April and May, and then remain north of $125 for the duration of the summer. By November there could be a reemergence of $130/cwt. fed cattle to finish out the year. Keep in mind that these cattle prices are likely to deteriorate with any major disturbance in the general economy. This remains the "800 pound bear in the room".

Adding bullish pressure to the market is the expected decline in beef production during the year. Despite the increased supply of beef currently being offered by packers, the actual quantity of beef being produced is expected to be lower in each quarter of 2012. Both fed cattle marketings and feeder cattle placements were predicted by analysts to be lower in December, while cattle on feed inventories remain about 3 percent greater than those of a year ago. The USDA January WASDE report predicts a 4.6 percent reduction on the production of beef in this year compared to last. The third quarter could see a 6 percent reduction in beef production compared to the same time period last year, as the current decline in placements will affect the availability of finished cattle during the late summer months.

The January cattle report for beginning of the year inventories reported the expected declines in total cattle numbers. There are now less than 91 million head of cattle in the US, and less than 30 million head of those are production beef cows. The supply of beef feeder cattle continues to decline, while cattle on feed inventories are slightly higher than a year ago. While numbers are up, the supply of finished animals is expected to be substantially lower nearly every quarter of 2012. Beef heifer retention was up slightly from last year but was still 4 percent lower than the quantity seen at the beginning of 2010. In short, cattle numbers are still lower, beef supplies will be down, and while there are early signs of an expansion beginning to phase in we may see declining beef supplies for the next 3 years. Table 1 contains a summary of the January cattle report.

Table 1. Summary of January 2012 Cattle Report
  Million Head % Change
All Cattle 90.8 -1%
Beef Cows 29.9 -3%
Beef Replacement Heifers 5.2 +1%
Dairy Cows 9.2 +1%
Dairy Replacement Heifers 4.5 -1%
Other Heifers 9.6 -2%
2011 Calf Crop 35.3 -1%
Cattle on Feed 14.1 +1%

February 2012

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