Think BIGGER

Market opportunity continues for beef operators who adapt to consumer demand and find ways to stand out.

David King believes customer-direct sales offer a growth opportunity for cattle producers, Image by Debra L. Ferguson

It’s a kind of hard-earned freedom when a cattle producer builds a direct-sales platform. Those who hit the mark are a unique brand. They know buyers will ask questions about their products, and they come prepared with answers. It’s proof, in a way, that patience pays--literally.

Consider Kingsland Ranch Beef, a branded product from the King family, out of West Monroe, Louisiana. David King says they started positioning the herd to move into direct beef sales 19 years ago. Today, the venture supports a cow herd of 140 head, and King says expansion is in the future.

“We want to take our herd from where it is now to 400 mama cows. That’s where we’d like to be,” he says.

What King is experiencing, both in terms of opportunity and that openness to a direct connection with consumers, is something many in the beef industry predict all producers will deal with in the not-so-distant future.

While demand for beef and the reputation of U.S. product are strong, export markets and individual buyers are increasingly looking for reassurances of safety and origin. The ability of the industry to provide the same type of open information King gives his customers will decide what kind of market American beef producers enjoy not just in 2018 but for decades to come.

PROFIT FACTORS. To illustrate how demand can throw the market a curve, Glynn Tonsor says to look no further than 2017. That’s when the industry took an uncommon turn, as demand drove fourth-quarter calf prices higher. That kind of late-market surge has happened just five times in the last 15 years.

The Kansas State University beef economist explains: “Last year, we saw beef demand, both domestically and on the export market, get stronger throughout the second half of 2017. Typically, due to a higher supply of calves beginning in September and October, we see prices pull down. Given enough demand, you overcome that. The result was almost everyone last year got a better price than they thought they would.”

Tonsor says that fourth-quarter anomaly isn’t something he expects to see repeated in 2018. He predicts this year’s market to be more of a break-even environment largely because of mostly stable input costs.

“The cost to run a cow in 2017 was around $807; we expect this year, that will be around $812,” he notes. Clearly, drought conditions that force producers to purchase more feed could increase costs.

Tonsor also believes there’s opportunity for stockers this season. “There are two ways stockers do well in this market. If demand is strong and we see trade deals improve, or the global economy grows faster than projected, anyone selling a heavier animal benefits. So, those in the middle who bought calves and added weight are in a good position.

“The other way stockers do well is by buying discounted calves,” he continues. “If I buy calves in October in a bearish market, and during the winter the outlook improves, I sell at a higher value than I bought at. The stocker sees upside, but it’s a negative for the average cow/calf producer.”

Tonsor believes the high end of the calf market has already been set, unless some market dynamics change moving into the second half of 2018.

“Supply pressure going forward looks to be greater than demand,” he notes. “So, if a stocker is making money, it’s probably going to be because he got a cheaper calf.”

ADAPT TO SUCCEED. Missouri stocker Tim Saunders says his side of the beef business has always been about making the margins work. The Rea operator constantly tweaks his program to maximize those margins.

“We’ve increased the number of calves we’re backgrounding and decreased the number we’re finishing here,” he says. The change was due mostly to issues with mud and his desire for access to other options for packing plants. It also fits with his growth goals for the business.

“I felt we were getting too much shrink doing long hauls,” he explains. “I hope we’ll have more carcass weight by making shorter hauls. I’m also looking for expansion opportunities. Right now, we turn the yards 1½ times. As a preconditioner, we can turn the yards three or four times. That’s without changing capacity.”

Saunders, who, in the past, has averaged backgrounding around 2,000 calves annually, says he is working with some Kansas finishing operations to try out his plan.

Protocol for the stocker remains pretty much the same, he adds. Saunders buys 3- and 5-weight calves from sales barns in the state. He feeds a ration of dry, rolled corn, ground hay and corn gluten feed.

Not one to make long-term projections for calf prices, Saunders admits he starts to feel concern anytime packers have the market leverage. “When they have plenty of cattle to pick from, they become more selective and increase discounts on certain types of animals,” he says.

Saunders believes the keys to his profitability are flexibility and making the best economic choices at any given time. Some years, that calls for him to put up silage, for example. Other years, the corn and soybean producer says that isn’t the right call.

“The key for us is don’t get locked into one production scenario. As fast as our industry is evolving, I’m always looking for opportunities; but I think you have to stay fluid to evaluate them.”

SMALLER CALF CROP. Being able to adapt may be especially key this year, as some industry adjustments have been large. Consider early adjustments to calf numbers in USDA reports. Lance Zimmerman, market analyst with CattleFax, notes the agency’s revision in January was the second largest in 20 years.

“In July 2017, the USDA increased the calf crop by 1.2 million head. Then, in January, they came back and said we are looking at a calf crop up 700,000 head,” he says.

One possible explanation for that big of a revision, he believes, was weaning percentage and the breakdown of females in the herd. “It appears that a significant number of females were classified as cows, or bred females, that didn’t wean a live calf.”

Regardless of why the adjustment to calf crop size was made, it means the beef industry is likely looking at a situation where calf supplies for this year were front-loaded.

“In January, the cattle on feed number was up 8% year over year,” Zimmerman notes. “That makes sense. Every market signal from every segment said sell. Feedyards made money in 2017, and they were eager to buy and fill pens.

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“While the on-feed number is up, the calf supply outside of feedyards is down 3%,” he continues. “So, it appears that all of our increase in production that can go through the system is already in the feedyards. And, the outside supply is constrained.”

Depending on how feedyard margins work out, Zimmerman says prices for feeder cattle and calves could stay near year-ago levels into the fall lows. This balances out the bargaining position of producers selling to those in the next segment, whether that’s the stocker, the backgrounder or the feedyard. He says it’s possible the lows established in 2016 could truly be the long-term market lows for cattle, withstanding a demand catastrophe of some type.

“If demand remains normal, price lows for fed cattle could remain in the upper 90s to $1 area,” he says.

RETAINED FEMALES A SIGNAL. When looking at female retention numbers, Zimmerman says keep in mind there’s a two-year lag. This year’s numbers, he believes, will say a lot about how producers see the future.

“What does it mean if we flip the page, and, a year from now, bred-female numbers are similar to this year’s? Usually, when you see producers start to decline heifer numbers, it is a trend that continues five to six years. But, if Mother Nature gives us some moisture, and producers have a positive outlook, they may be willing to keep more females back. Texas and the Southeast have the capacity to bring more cows back to grass. Our herd capacity is far from exhausted, and we need to keep an eye on that. It could be a game changer.”

For now, Zimmerman believes cow herd growth is likely to continue into 2019 and even 2020 if profits hold.

Derrell Peel, veteran beef economist at Oklahoma State University, adds even if lower replacement heifer numbers are reported going forward, it doesn’t mean expansion is over.

“If this year holds together, we’ll get another sideways year or close to it,” he says. “I don’t see pressure at the cow/calf level to liquidate. Producers just may not continue to add at the rate they have in the past.”

MANAGE COSTS. Where the opportunities and challenges lie this year will depend a lot on the individual operation, Peel stresses. He says this market is a work in progress, and if demand holds, 2018 is going to largely be a repeat of 2017.

“My general expectation is we’ll have a bigger calf crop in 2018, which would be the fifth year in a row. That means we will have supply challenges. By the fourth quarter, there will be pressure on calf prices. How much pressure we see depends on demand. On the whole, if we see prices fall, we probably won’t be any more than 8 to 10% below where we were last year.”

Because supply pressure is unlikely to change, Peel stresses any weakness or interruption in demand will be to the down side. The key, as always, is going to be cost management.

“In general, I believe there will be opportunities for profitability at the cow/calf level dependent on costs. At the end of the day, you don’t control much of the revenue side, but you can control resources and how you use them. It always comes back to what you can manage as a producer.”

PUT THE PIECES IN PLACE. Louisiana’s David King may be focused on direct marketing, but he’d agree herd management is his make-or-break ingredient. He says a key for his business has been finding the right composite for both the area and the end use. They use Red Brangus cows crossed with Hereford bulls.

“The Brahman influence is important for insect and heat tolerance,” King notes. “We like the Red Angus because they can stay out longer in the heat than the Black Angus, and they give us the marbling we want. When we added the Hereford, we saw consistently bigger rib-eye areas.”

Currently, he sells about 70% of his herd’s calf crop each year through the Kingsland Ranch Beef label--about 48,000 pounds. Those calves that don’t meet his no-antibiotic, no-hormone criteria or are 450 pounds or less at weaning are trucked to the local sales barn.

King estimates, on average, they see about a 30% premium over sale-barn prices on calves he feeds out and markets consumer-direct. Weaned between 5 and 6 months of age, they are grass-fed and finished on a mixture of hay, corn, soybean meal and molasses.

“I really believe there is an untapped demand for this kind of beef,” King says. “Consumers want to know where the meat they are buying comes from. If it’s local beef, and it carries your name, that’s your reputation on the line. You are trying to do the best for everyone. Even if they just buy a pound of hamburger, I want it to be the best hamburger I can give them.”

And, while there are going to be ups and downs in the cattle market, King is convinced the future is bright.

“I think our industry is going to continue to grow, especially in the area of premium beef product,” he says. “When you look at our market on the whole, here and globally, I have every optimism that we are in a long-term growth trend.”

CONSUMER DRIVERS:

America’s animal protein producers are in “an incredibly opportunistic position at this point in history.” That’s according to Don Close, who reports beef, pork and poultry are all expected to see increased domestic per-capita consumption this year by a total of 1.3%.

Close, Rabobank protein analyst, stresses this strong demand environment, combined with the quality and food safety for which U.S. product is known, will drive the beef, pork and poultry markets throughout 2018.

“In addition, there is an abundant feed grain supply on hand that makes us very price competitive,” he notes. “In the case of beef specifically, North America is collectively the single source globally for quality and ultrahigh-quality product. Supply of Choice and Prime cattle here is over 80%.”

POULTRY. Expect continued growth in this segment, but not without some production challenges as the industry responds to consumer preference. Rabobank’s “Global Animal Protein Outlook 2018” projects 1.8% year-over-year growth in slaughter levels for the U.S., slightly below historical trends.

Close notes three drivers here. One, the number of poultry grown without antibiotics is slowing production. Two, there is a pushback from consumers against large birds, and, as the industry addresses this, it’s holding down average carcass weights. Three, consumers want a more natural process, which equals slower growth.

“All three of these factors affect production,” Close says. “We have more birds in the pipeline, but the output is lower.”

U.S. poultry per-capita consumption for 2018 is projected to increase around 1%.

PORK. Expansion continues for the fifth straight year. New slaughter capacity in the industry gives producers a reason to expand, leading to a Rabobank projection of 3.85% more hog production this year. Some 30% of U.S. pork goes to NAFTA-related (North American Free Trade Agreement) markets, so any renegotiation could change the outlook.

U.S. pork per-capita consumption this year is expected to grow 1%.

BEEF. Demand for beef continues to drive expansion and return positive prices for producers. Close believes the key to continued opportunity is centered around traceability and documentation.

“Consumers want, are demanding, to know where their food came from. That is not going to go away, it will only intensify,” Close explains. “Beef’s ability to delivery that story, that confirmation that the product is what it is labeled to be, will only be accomplished with full traceability.

“Do I want to advocate any more legal requirements or mandates? No,” he continues. “But in this one, specific case, if that is what is required to move the beef industry forward, I’d be willing to go there and at least consider it.”

U.S. beef per-capita consumption for 2018 is projected to climb 2%.

EXPORTS CRITICAL, RISKS HIGH:

If U.S. beef exports are going to keep up with production, the immediate future rests on consumers in just five countries. The longer-range outlook, however, ties more closely to the East’s economic powerhouse, China.

Trevor Amen, animal protein economist with CoBank, says today’s export market is concentrated around Canada, Hong Kong, Japan, Mexico and South Korea. This is where 80% of current export volume goes. Last year, U.S. beef exports accounted for 11% of production, the highest level in history.

That number was helped along by sales to emerging markets like Chile, Columbia, Peru and South Africa. Trade disruptions with any of these countries, Amen notes, will have ripple effects in terms of oversupply, price pressure and margin compression.

“The continuation of a business environment where we have free trade and open markets, and the global flow of livestock and meat, is critical to the beef industry,” he stresses.

When it comes to continued trade talks, Amen says predicting negotiation progress and outcomes is virtually impossible in the current environment. That uncertainty may play a role in the confidence of the beef market this year.

Trade agreements especially critical to the industry’s future include NAFTA (North American Free Trade Agreement) and KORUS (United States-Korea Free Trade Agreement). In addition, Amen notes the absence of participation in TPP (Trans-Pacific Partnership) will highlight the importance of successfully negotiating competitive bilateral agreements.

The big market prize continues to be large-scale, open access to China. It’s the fastest-growing importer in the world, with the fastest-growing middle class. U.S. producers will have to take steps to maximize availability of product that can meet this buyer’s parameters.

That is going to call for a leap of faith. Currently, Amen says, it costs an additional $200 to $250 per head to produce cattle that fit China’s trade parameters. This is tied to the need for animal traceability, as well as a supply of cattle free of growth promotants, such as beta-agonists.

With traceability, Amen says work is under way to figure out the best approach. He explains the industry needs a technology platform to aggregate the data it already has and then be able to efficiently track it. Ultimately, he believes, a system will exist that can meet the needs of all of America’s trading partners.

“As this market matures, I believe we will reach a point where the economic signal reaches producers that there is an incentive to produce those cattle that will be eligible for China’s import program. While we are in transition, though, it’s difficult to significantly increase supplies because of a lack of a guaranteed premium on the other end.”

FOR MORE INFORMATION:

> CattleFax

> CoBank

> Kansas State University

> Kingsland Ranch

> Oklahoma State University

> Rabobank

Actionable Insights:

> Expect a sideways beef market, with any profits tied closely to cost management.

> As supplies increase, demand is key to market opportunity.

> Changes in trade policy could create a demand crisis for beef.

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