Going Green

Friday, February 22, 2008

Where Is The Beef?

Cattle producers are facing a wild-and-crazy ride over the coming months. This year promises to be even more unpredictable than the last few.

A number of factors will significantly impact cattlemen and livestock markets. One of the big ones is that it is an election year. The different political parties have different approaches to how best to manage the economy. They each have different priorities on how our tax dollars are spent. They each have different attitudes toward the role of government (although those differences are not as distinguishable as they once were). The projected and final outcome of first, the primaries, and then the general election, will add volatility to markets that are already bouncing all over the spectrum. It would be nice to have a crystal ball.

Ethanol will continue to be a major factor influencing beef production. The immediate impact is at the feedlot where cost-of-gain is heavily influenced by corn prices. That impact ripples back through the supply chain to impact feeder cattle prices, stocker cattle prices and ultimately cow prices.

Commodity prices, which are currently being driven to a large extent by ethanol, also affect land use allocation on farming operations. Some lands that have traditionally been used for grazing are being shifted to crop production. Crops that are usually grazed, such as wheat in the southern plains states, are now being held back from grazing because the value of the grain production outweighs the value of leasing the crop to pasture cattle. Recent reports indicate that cattle on wheat pasture this winter were over one million head fewer than last year. Part of that was due to drought conditions, but part of it is due to the desire of the farmers to harvest the wheat for grain because of extremely favorable prices.

We still don’t have a Farm Bill. The uncertainty stemming from the lack of a Farm Bill impacts both commodity and livestock prices. We don’t know what payment caps may be placed on direct payments. We don’t know what taxes may be added. We don’t know how much emphasis will be placed on conservation and energy measures. In short, we really don’t know anything until a bill is passed. This may be the single biggest factor for determining markets over the coming year.

What will happen in the export markets? We have dealt with the BSE crisis and with bone fragments in exported beef. We have been negotiating for years with some countries over easing import restrictions. There appears to be some progress, but the outcome is uncertain at best. The level of exports has a tremendous impact on the price of beef.

Drought in some key beef production areas has impacted calf production. The Southeastern U.S. is one of the most important cow/calf areas of the country. A large portion of their cow herd has been liquidated due to drought conditions the last couple of years.

Other trends that are impacting cattle numbers include things like urban sprawl. Many cities and suburbs have expanded into areas that were once prime cattle producing ranches. Central Texas and the Dallas-Fort Worth areas have become covered with housing developments where cattle once grazed. Hunting and other recreational uses have also removed many ranches from production. Often, hunting leases are tied to exclusive use rights – in other words, no cattle grazing in conjunction with the hunting lease. National forest and BLM lands are also under increasing pressure from environmentalists to reduce grazing. Droughts in western states have further reduced the carrying capacity of much of the federally managed lands.

For the beef producer, there may be some glimmer of hope. Reduced cattle inventories will eventually lead to improved prices for those who remain in business – especially if export markets are re-opened. Increased beef prices will help to offset the negative impact of higher feed prices. Higher feed prices will lend toward a shorter feeding period which may contribute to a shortening of the marketing cycle. This should translate into smaller carcasses and an overall reduction in beef production which will further increase beef prices.

For the consumer it looks like higher beef prices are definitely in the future.

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