Cow/Calf Producers Face Dilemma

As the feeder cattle market competes for steers and heifers to fill feedlots and satisfy beef demand, cow/calf producers considering herd expansion are finding themselves on the horns of a dilemma.

Ranchers have three herd-sizing choices: expand, reduce or hold steady.  If they want to expand, they have two more choices: retain heifers or sell and buy better-quality or cheaper replacements in the form of heifers or cows.

In previous cattle cycles, reductions in feeder cattle supplies meant higher prices and more profit for cow/calf producers, increasing the incentive to hold a few heifers for breeding to supply a short feeder cattle market.  But this can take two years to see any returns on investment of $1,400 to $2,000 a head.

During that time, the market for feeder cattle could turn south suddenly as it did in December of 2003 when Bovine Spongiform Encephalopathy, or Mad Cow disease, was discovered in an imported dairy cow in Washington state.  Beef export demand could falter.  Or the retained heifer could die.  And it will take many calves to recoup the investment.

Alternatively, feedlots are paying in the range of $1,500 a head for a 750-pound feeder heifer, and there is no more risk of death and no more costs for keeping her around and healthy to produce those calves.

It’s little wonder, then, that many producers are opting to take the money and run.

It will take an estimated five to seven years for the cow/calf industry to catch up to beef demand, sources say.  The problem is that at current prices, it may take at least that long to recover the investment.

 

FEEDLOTS PUSHING THE PENCIL, TOO

 

If cow/calf producers have tough decisions to make, feedlot managers are pushing the pencil, too, to minimize the risk of coming up with a loss on the cattle placed on feed.

The possibility of a record corn crop this year and continued strong beef demand are keeping feedlot managers awake thinking of the possibilities, but record-high feeder cattle prices give them the jitters.  The bottom line is that feeder cattle prices must be calculated against possible returns before committing the cattle to a feed bunk.

In addition to seasonal influences, wholesale beef and cash cattle prices are being pressured by the increased slaughter and beef production.  As beef production rises, the USDA’s beef cutout value shrinks along with the price paid for fed steers.

During the current rebuilding phase of the cattle cycle, sources report an increasing focus on boosting the genetic quality of the nation’s cattle.  Statistics from the University of Missouri show more consumer substitution away from select beef and toward pork or chicken than there is for choice or prime beef.  Producers are responding by upgrading their herd’s genetic propensity to produce choice or prime carcasses.

 

CASH TRADE REMAINS QUIET

 

No cash cattle trade was reported Wednesday with bids from $151 to $152 on a live basis and around $240 on a dressed basis.  Asking prices held at $155 to $156 live and $245 to $248 dressed.  Cattle traded last week at $152 to mostly $153 live and $241 to $243 dressed.

USDA’s choice cutout value Wednesday fell $1.07 per cwt to $247.41.  This was down $4.14, or 1.65%, from $251.55 a week earlier

The USDA’s select cutout value also declined, moving down $0.88 per cwt to $237.60.  This was $5.47, or 2.25%, below last week’s $243.07.

The choice/select spread narrowed Wednesday to $9.81 from $10.00 but overall continues to widen seasonally as the percentage of choice production rises against the percentage of select.