Quality Opportunities in Beef Expansion

NEW ORLEANS (DTN) -- Depending on what part of the country you raise cattle in, herd rebuilding is already underway. A look at strong, late-2022 prices for replacement heifers clearly indicates producers in some regions are adding females and signaling optimism for the months ahead.

Reaping the rewards of a strong feeder market will be the most immediate gain for cattlemen with more head to sell. But there's a second, longer-lasting advantage some will take away from this expansion phase if it's used as an opportunity to improve cow herd genetics.

Terrain beef analyst Dave Weaber told DTN he was already hearing cow-calf producers talk about high prices for replacements in late 2022, as they considered the best timing for expansion.

"A lot of producers had let females go earlier, and now are seeing them sell at $2,000 a head and up. Everyone is amazed at the cost right now, and it's likely only going to go higher," he said. Terrain, a new name to some, offers industry and market analysis and forecasts from American AgCredit, Farm Credit Services of America, and Frontier Farm Credit.

NEW REPORT ON REBUILDING

This group's newest report on beef herd expansion, "Rebuilding the Beef Supply Chain After the Drought" was released at the National Cattlemen's Beef Association meeting in New Orleans. In it, Weaber looks at how consumer preferences shifted post-COVID, as well as how inflationary pressures have reduced real consumer spending.

He said a trend of increased price spreads for upper, two-thirds choice and prime beef carcasses has put renewed focus on high-quality grading cattle genetics, combined with a need for improved feed efficiency and traceability.

"What should really get the supply chain's attention is the explosive nature of the prime-to-choice price spread when prime product, as percentage of the total, gets a little bit short," Weaber wrote in the report. "The spread went from $26/cwt in late March to early April, to $92/cwt (or $162 per head) during the second week of October 2022."

All of this signals that for the cow-calf producer, high-grading and high-cutability carcasses, along with improved maternal traits and feed efficiency will become increasingly important.

Weaber explained the tradeoff for feedlots in the years to come will be in managing a balance between producing more prime carcasses, and producing more yield grades 4 and 5. Discounts on the 4s and 5s could exceed the prime premium.

"Generally speaking, in the current feeding environment for every prime-grading carcass added to the mix, three or four carcasses that are yield grades 4 or 5 are added," he said.

ALIGNING EFFORTS TOWARD DEMAND

One of the unique opportunities this rebuilding phase will provide cow-calf producers, said Weaber, is to become part of what he calls "a marketing system". This means aligning efforts among seedstock producers, cow-calf, stocker, and feeding operations with a slaughter facility and retail outlet.

"These coordinated systems will be uniquely positioned to deliver high-quality, feed-efficient, traceable cattle and beef with marketing that consumers can embrace," he said. "Being part of such a system will likely be the only way for cattle producers to share in the additional value and dollars such a system can create."

Branded programs, he told DTN, are probably the way of the future, and certainly a common path to achieving a goal of giving consumers those things they prioritize in the product they buy.

"Some consumers want no antibiotics, some non-GMO fed, some hormone-free ... whatever is important to them will create a market opportunity," he said. "We see some cattle $400 a head over choice market, which is pretty elite genetics. But this just shows us that the more boxes you can check, the more cattle are worth in today's environment. There are a lot of cow-calf guys who don't like calf prices, but they won't chase program money. I'm telling you this is as big, or as small, as you make it."

A risk to beef demand in the months to come will be economic, as Weaber noted recessionary trends already in place in the U.S., with gross domestic product (GDP) declining for the past two quarters compared to a year ago. Inflationary pressures will force consumers to make what the analyst calls "hard choices" as higher prices for core items, and rapidly increasing costs for food and energy as a whole, will certainly be headwinds to growth for beef demand.

In the report he said: "The rapidly rising Consumer Price Index by the U.S. Bureau of Labor Statistics describes the eroded value of the dollar, essentially any given price per pound buys less beef. USDA's choice retail beef price is the best consumer-level gauge of price for beef, and it set new all-time record monthly highs from July 2021 through July 2022. By this measure retail beef price has been relatively flat for all of 2022, at an average price of $7.63 per pound."

Making a comparison to other proteins, Weaber said through October 2022 choice retail beef prices averaged 6.7% above a year ago, while retail pork prices were up 10.1% and retail chicken prices were up 16.6%. Both retail pork and chicken prices, as reported by the USDA set new, record-high monthly prices.

"From a competitive standpoint, beef appeared to have a winning hand with consumers," he noted, "as nominal beef prices were stable to slightly declining while competing meat prices were rising quickly. During a low-inflation period, this would have been true. But in the high inflation environment, real (deflated) expenditures and net beef demand didn't keep pace."

He explained that even though nominal retail beef prices look relatively flat, "on a real deflated basis they were not keeping pace with inflation, and thus were declining."

CHINA AND EXPORTS

The importance of beef exports places high in Weaber's analysis of the months ahead. January through October 2022, he noted, beef exports were up 4.6%, totaling just under 2 billion pounds on a carcass weight equivalent basis. The key driver of the growth was China, whose buying was up 25.8% for that period, compared to a year earlier. Weaber said this growth in purchasing has made it harder for traditional markets to source U.S. product.

The export market is in a higher-risk phase, however, with a possible global recession posing what Weaber calls "significant risks for U.S. beef and cattle." He explained a rallying dollar makes U.S. beef more expensive and threatens the buying power of foreign consumers.

TIME TO RIGHT THE SHIP

Timing is going to be everything for the beef market looking out the next year, said Weaber.

"If the industry can maintain these levels of consumer spending near term, and right the ship in terms of demand volume during the next six to 12 months, the system may then be able to go through a period of cattle price readjustments to the higher side, pushing margins that exist today in the beef side of the business (retail/foodservice/packers) toward the cow-calf, stocker, and feeding sectors of the business."

That shift, said Weaber, could provide needed capital and incentive to rebuild and improve cow herds.

Lastly, the analyst said cow-calf producers will likely see contra-seasonal price patterns in 2023, similar to what happened through 2022.

"Look at the price rally for fed cattle in 2022, and we saw the same thing in 2021," he stressed. "This year looks a lot like that. We are looking at the season's largest supply numbers right now, in January. As we move toward mid-year those numbers just get progressively tighter and keep driving prices higher. We will see stiff competition ahead in the meat space at the store as that happens. We need beef at $8.20 to $8.30 per pound (retail) to keep spending numbers where they are, and that's not a very big stretch as we are around $7.60 today. The back half of 2023 is when I think we'll see the increase."

Victoria Myers can be reached at vicki.myers@dtn.com

Follow her on Twitter @myersPF

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