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We need to gain a little perspective on cattle profitability

Through the 2016 winter “meeting season” I had discussions with many individuals involved in all levels of the beef industry about the current status of the beef economy. Much of the discussion has focused on the price volatility in beef markets since the historic price peaks reached in 2014 and the first half of 2015. These once-in-a-lifetime price levels will always be a fond memory for active participants in the market at that time. Unfortunately, the memory of these prices and the current beef economy has combined to make price forecasting and long-term planning a challenging task.

Sales of all classes of cattle at weekly auction markets as well as at production sales featuring bulls and females have seen lower prices compared to the previous 12 to 24 months. Producers have expressed concerns over the significant drop in prices and where do we go from here. At the risk of oversimplification of a complex economic phenomenon, I think we should review a few of the key factors that impacted prices in the second half of 2015.

The historic price levels of 2014-15 finally encouraged producers to aggressively expand their breeding herds. Fewer heifers entered feedlots and remained on farms and ranches. Expansion was encouraged by the weakening of drought conditions in the western United States. While domestic beef demand has remained positive since the price peak, export sales of beef have struggled due in large part to the strong value of the U.S. dollar in world markets. Much of the rapid drop in fat cattle prices last fall can be attributed to the larger supply of fed cattle at record large carcass weights that resulted in a temporary surplus of beef in the supply chain. Our primary competition in the protein market, pork and poultry, have aggressively increased their overall production as well.

Before we get carried away with too much doom and gloom for the economic outlook for the beef industry, I think producers should keep a realistic view of our current prices from a historical perspective. Much like the euphoria that grain producers felt with $7 per bushel corn a few years back, record high beef prices were not sustainable forever. While beef prices have retreated significantly from the highs of the past couple of years, today’s prices look very favorable compared to any years outside of 2014-15.

In my opinion, the current market for potential herd sires provides a fairly accurate picture of overall beef cattle markets at this time. Average sale prices for bulls in Ohio and across the United States are lower than a year ago but look very similar to 2014. Excellent bulls are in high demand and still bring premium prices. There is solid demand for good bulls as well. It does appear that breeders kept too many bull calves for the current demand as prices for the lower 25% of bulls available is softer than the past couple of years. In other words, buyers are being more discriminating when making purchases this year. This sounds very similar to the consumer of our ultimate end product — beef. Provide the customer with a consistent, high quality product and demand and eventual sales will be positive.

The obvious question that is being asked today is “Where are beef prices heading in the future?” There are folks much smarter than me that can offer a much more qualified response to the previous question. Basic supply and demand economics would suggest that like the beef cowherd expansions before, prices for fed cattle, feeder cattle and calves will move lower based on additional supplies. U.S. and global beef demand will dictate the magnitude of the decline.

While prices may moderate, the short- to intermediate-term outlook is generally positive. However, we must recognize that every segment of beef production including cow-calf, backgrounding, stockers, and feedlots are cash-hungry enterprises that will require aggressive management to remain profitable. Here are a few suggestions to keep in mind:

1. Manage against rising costs by improving production efficiencies.

2. Use technologies that increase production efficiencies and offset the risk of declining revenue.

3. Keep in mind that weather risk is unpredictable and make business decisions that can withstand worst-case scenarios.

I contend that we are still in a very exciting time to be involved in the beef industry. We must accept that future profits will not come as easily as they did in 2014 and 2015. Those who plan ahead wisely by managing costs and making sound marketing decisions can increase their chances of long-term success. The producers that can accomplish this will be given the privilege of producing the best-tasting source of protein for consumers around the world for years to come.

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