Cattle Producers Must Balance Multiple Factors to Remain Profitable
Balancing While the Bulls Run
An all spring-calving herd of 600 mama cows means Travis and Sarajane Snowden barely have a chance to catch their breaths come mid-April. That's when calves start hitting the ground here in Colorado's Yampa Valley. By the time most of these calves are 530 to 550 pounds, they have a buyer. And, by late October, wheels start going under them as they are truck-weaned straight off their dams.
It's a tight season, but it's all about making the most of the days this beautiful high-country spot gives. Travis says they see about four months of growing season, meaning just one hay harvest. The other eight months are muddy -- or winter. Late-summer pastures are at 9,000 feet, so cattle coming off Snowden Ranch are sturdy, and bulls have to be bred to handle the harsh environment.
Most years, Travis says they sell about five truckloads of calves, holding some over to send to a grow yard in Wyoming.
"Those are the odds and ends, the colors and the smaller calves," he explains. "We put another 120 days on them in the grow yard, and then we sell them around January when the wheat folks are buying feeders."
The Snowdens are also known for selling replacement heifers, but right now, prices for feeders are so strong, they aren't holding over any females.
"Our cow base is really young, so we are selling everything," Travis says of their commercial Angus-based calves. "Selling all our yearlings in the fall lets us take full advantage of this market, where supply of feeders is down and demand is high. You have to be able to adapt to get what the market will give you."
It doesn't hurt if you have a stellar reputation with cattle buyers. Travis says they are blessed to have repeat buyers, so when they sell calves through video auction around July, the demand is there. Steers usually leave the farm between 550 and 575 pounds, heifers between 530 and 540 pounds. Last year, their steers brought $2.46 per pound, with heifers 10 to 15 cents off of that.
While the Snowdens are hopeful the feeder market stays strong for a long time, they also like to stay diversified through consumer-direct sales that allow them to get a higher per-pound price on some of their beef. Along with Travis' dad, Bob Snowden, the couple started Snowden Meats in 2020. The online direct-sales platform takes their finished beef to consumers across the country. They also sell locally to consumers and restaurants. This growing side of their business is one Travis says isn't controlled by packers, meaning they get a larger share of the value of the animal they've raised and in which they've invested.
For the Snowdens and other cow/calf producers across the U.S., when it comes to this market cycle, the big question is just how long can the good times last? Is this another 2014? Or, is the 2023 market different, and if so, how?
THIS IS NOT 2014 ALL OVER AGAIN
Bernt Nelson says not to look back to try to figure out where today's market is headed, because fundamentals have completely shifted. He expects at least two years of especially strong cattle prices from feeders to breeders.
Raised on a North Dakota cattle ranch, Nelson is an economist at the American Farm Bureau, based in Washington, D.C. He says when comparing the two cattle cycles, producers should consider market exposure.
"Going back to 2014, we were coming out of what we were calling the great recession. There was a contraction perceived in the market, which led to liquidation of cattle. We were left with a market where the cow/calf producer was trying to expand and trying to get bred heifers, and paying astronomical prices for them. But, the debt situation then was very different from what it is now."
Nelson points out that interest rate hikes and higher operating costs are key differences between now and 2014. Producers still have good access to credit, for example, but the cost of that credit is higher.
"As a result, in some cases, we are going to be looking at higher debt loads and more costly debt loads moving forward," he explains. "That will make the financial situation for producers very different than it was in 2014, and it changes how lenders see things, as well. Today, you need more working capital to secure credit, more collateral to secure credit. That's where the balancing act comes in for a lot of producers," he continues.
In addition to financial worries, drought and its effects continue to be a factor. Some analysts talk about drought as though it's in the cattle industry's rearview mirror, but we're really not there yet, Nelson says.
"Evidence supports a weakening La Niña trend, but if we talk about drought, it's important to note the damage has been done. It takes time to recover. I hope we see weakening drought moving into late spring and early summer, but we still need time for pastures to recover, and in some areas, that will take longer than in others."
WATCH FOR MORE HEIFER RETENTION
Nelson points to a cycle of expansion and contraction in the cattle industry that tends to range from 10 to 14 years. Inventory goes up, inventory goes down. Last year, a lot of females went to slaughter, a trend that is continuing so far. The USDA's most recent "Cattle on Feed" report, for example, showed levels down 7%.
"To rebuild our herd and our feeder supplies, we first have to start retaining replacements," Nelson continues. "When that happens, it's going to pull even more calves out of the supply line. We aren't doing that yet. And, because of that, I think we are looking at two to three more years minimum before numbers start to rebound."
DTN livestock analyst ShayLe Stewart agrees, noting it won't be until green grass and profitability come back that cow/calf producers will really be ready to start rebuilding the breeding side of their operations.
"Once those two components are factored in, I believe we will see replacement-heifer prices climb astronomically," she says. "We are already seeing extremely strong bull prices on the commercial herd side. Today's guidelines tell us a good rule of thumb on bull pricing for commercial producers is four times the price of a 550-weight steer. Every operation will have different criteria for what they need in their breeding program, but as an industry, we know how important it is to have the right genetics. You need the complete package today in terms of marketing.
PARTNERS MARGIN, LEVERAGE AND DANCE PARTNERS
Packer margins are a hot-button for any cow/calf producer. Nelson says to think of margin as who has the leverage, the packer or the producer? Today, on the cash market, which was more current at press time than the futures market, the leverage is with producers. But, on forward contracts, the leverage still leans toward the packer. That is all about to change, the economist says.
"If we look at cash offerings late March across the South, live cattle were asking 165 to 167; compare that to last year in the 150s," Nelson explains. "As we've seen this shift, the packer has maintained margin, so the market hasn't gotten away from them yet."
Moving forward, though, he says tighter feeder supplies and the need for the packing industry to meet expected demand means packers will likely be willing to pay higher cash-asking prices. As they do, margins will shift more to producers -- something the industry hasn't seen for quite some time.
"As this tightens, packer behavior will change," Nelson predicts. "When they have the ability to maintain profit margins, we'll see aggressive buying as they try to maintain the balance. So, they will try to make all they can while they can. But, they know if they do too much too fast, they will lose control of the market, and they won't be able to stretch this out."
As exciting as it is for producers to be in that positive margin position, it's important to see the whole picture.
"Packers write our checks, and we need to remember that," Nelson cautions. "They are a dance partner, and as we move into unknown economic situations where we could see consumer confidence erode, we don't want to see prices rise too fast, or it will hurt demand."
AGGRESSIVE FEEDER SALES
As producers like Travis Snowden continue aggressively selling into the feeder market, overall supply numbers are tethered tight to cost of production in most areas.
In the South, for example, University of Tennessee economist Andrew Griffith says producers are especially concerned about high fertilizer and feed prices. Low hay stocks is another ongoing factor.
"Many producers by the end of March had burned through most of their hay reserves, and they were already concerned about the hay crop this year," Griffith explains. "Many of them say it won't be enough to fill the barns. A lot of our cattle producers try to have two years of hay supplies on hand, but it's unlikely we'll see that kind of reserve built back in during 2023."
The feed outlook is influencing heifer retention here, as well. He says no one is keeping anything more than their feed and hay resources will allow.
"We lost several cows this year simply because there was not going to be enough hay, so producers sold them. Our producers are rationing feed resources to maintain the herd they've kept, but we won't see heifer retention until maybe the second half of the year."
And, while producers are excited about strong feeder prices, Griffith says there aren't many playing the wait-and-see game.
"They are selling calves and taking the money home," he says. "Moving those calves is saving hay. Today, a 550-pound steer in Tennessee is over $1,200."
Wyoming-based market analyst Stewart says she's hearing the same enthusiasm as Griffith but adds it's important to remember every day won't be a market-topper as we move through this cycle.
"Sometimes, I think folks get mixed up when they hear we are in a bull market for cattle," she says. "Sometimes, we think a bull market means there are no bad days, no lower closes. In mid-March, we were seeing external pressures due to a banking crisis, inflation and higher interest rates, and we had days of lower trade.
"Do those days mean the bull run is over? They definitely do not," Stewart continues.
"We need to take the longer outlook, but we also need to remember the first rule of cattle marketing, which is that a bull run doesn't ensure a profit. You have to know your breakevens and target your inputs. That's how you get the most out of bull markets. It has to make sense for your individual operation. It has to be a balance."
COMMODITY PRICE OUTLOOK:
There may be some welcome news for feeders, as corn prices are expected to weaken moving into the fall. DTN lead analyst Todd Hultman says overall, markets will be mixed looking out to the last half of 2023.
CORN. Old-crop corn supplies will remain tight through the summer in the Western Corn Belt, with cash prices expected to stay above $7 per bushel in the Southwestern Plains and close to or above $6 in the Central Plains and the Northwestern Plains. In the Eastern Corn Belt, where production was more generous in 2022, corn prices are likely to stay in the low $6s and may experience downward pressure if Brazil has a successful corn harvest in July. On new crops, the weather will tell the story. DTN's weather team is expecting favorable growing conditions in the U.S. for corn this year, with fall harvest season expected to bring prices down to $5 or less across most of the country. In the Southwestern Plains, however, dry weather may keep prices as much as $1 higher than in the rest of the country.
SOYBEANS. Even with a record soybean harvest in Brazil this year, old-crop soybean supplies in the U.S. are expected to remain near their tightest levels in seven years. That should keep cash prices near or above $14 per bushel, possibly testing $15 at times. Brazil's big harvest means the U.S. export season may not start until October or later. Assuming a larger U.S. crop this fall, new-crop prices of soybeans are likely to fall to between $12 and $13 during and postharvest.
WHEAT. Prices have fallen more than expected in early 2023 and will vary by region the rest of the year. In the Southwestern Plains, where the hard red winter wheat crop is experiencing extreme to exceptional drought, cash prices will likely trade between $8 and $9 per bushel for the rest of the year. In the eastern U.S., an increase in production of soft red winter wheat is expected this year, with prices trading near $7 per bushel. Global wheat production will influence U.S. wheat prices, with the initial estimate from the International Grains Council supportive for wheat prices in 2023-24, as world wheat production is forecast to drop to around 28.9 billion bushels.
HAY. Even in areas where hay production is usually robust, supplies are short, and quality is questionable. The latest USDA "Direct Hay Reports" by state for the week of March 23, 2023, only showed 16 states with some type of hay sales. Comparing per-ton prices on large, round grass bales, prices ranged from a low of $117 per ton in Iowa for hay described as "grass" with a quality of good up to $330 per ton in Texas for hay described as bermuda with a quality of good. The USDA defines good-quality hay as having crude protein levels of 9 to 13%.
-- Follow Vicki on Twitter @myersPF
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