Producers can probably look forward to continued high calf prices through the fall as cattle feeders hold their noses and pay top dollar.
“It’s not pretty and none of us are looking forward to buying these calves, but that’s just the nature of the cycle,” said Marsha Cannon, president of the Saskatchewan Cattle Feeders Association.
Empty feedlot pens are making feeders aggressively chase calves, even as high feed prices ensure that feeders will probably lose money on every calf they fatten.
High retail beef prices sparked by strong consumer demand have been a godsend to the North American industry, giving all sectors of the beef chain good profits last year. But skyrocketing feed prices have meant that feeders, whose profitability is based on the margin between the combined price of calves and feed and the price the packer pays, stand to lose lots of money in the coming year.
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“You can profit in a year where calves are low and feed is high, and you can profit in a year when calves are high and feed is low, but when your margins narrow, you’re not looking at profit, and that’s where we’re at now,” Cannon said.
Most feedlot operators need to keep cash flowing into their businesses and can’t afford to leave pens empty.
The high demand for feeders has been a blessing for cow-calf producers beset by drought. Usually drought forces cow-calf producers to sell calves faster than they planned, which boosts supply and depresses prices.
But on the western Canadian plains, prices have hit historic highs regardless of producers’ need to sell.
“We’re in the middle of the fall run here right now,” said Herb Lock of Farm Sense Marketing in Edmonton.
Producers who are moving their calves early because they have run out of pasture and feed are benefiting from this unusual price situation.
“It’s pretty rare to have a drought scenario opening and have feeder cattle prices at record highs,” Lock said.
But other producers are selling earlier than usual because they aren’t willing to leave good money on the table.
“It’s profit taking on the part of the primary producer, just good, smart marketing,” Lock said.
Many analysts had expected the outlook to be worse this fall. The weakening U.S. economy was expected to hurt beef demand.
But demand has remained high, keeping retail prices high.
If demand doesn’t weaken, the beef price outlook for 2002 will be even better than present expectations, said Kansas State University agricultural economist James Mintert, in a recent commentary.
“Although recent placements of cattle on feed have been large, placements the rest of the summer and fall are expected to be limited by tightening feeder cattle supplies,” Mintert said.
“As a result, beef production during the first half of 2002 is expected to decline about three percent from year-ago levels, which should lead to slaughter cattle prices averaging between the high $70s US and the low $80s during January to June 2002.”
They are now just above $70 per 100 pounds.
“Beef demand strength will be critical to the actual prices cattle feeders receive.”
Cannon said continued high consumer demand could make feeders’ outlook look better, but “there still won’t be any profits.”
While the calf price outlook for producers looks good, Lock and Cannon said they think the fall peak has been reached.
“There’s no compelling reason to continue to own calves that I’m planning to sell this fall anywhere past tomorrow,” Lock said.
“It’s probably the best calf price (producers) will see in seven or eight years.”
Cannon said feed prices should stabilize after harvest, which will take some of the anxiety out of the feeder cattle market.
“I think it will settle down a little,” Cannon said.
“It’ll come down to a point where it’s not heart-stopping.”
The long range price outlook for cow-calf producers remains good because of the lack of growth in the U.S. cow herd.
In a typical cattle cycle, herd liquidation would have ended this year and expansion begun again, leading to a significantly larger herd and lower prices in 2005.
But drought in the southern United States last year and drought or low moisture in Montana and the northern tier states this year, along with troubles elsewhere, means the herd is still stagnant or shrinking.
That puts off bad price times by perhaps another year, said Anne Dunford of Canfax.
“If there had been normal moisture and feed conditions, we would have been into expansion mode by now,” she said.”Prices have certainly been telling producers that profits are good, so this is the phase where often you start to see producers holding back heifers. For obvious reasons that hasn’t happened.”
With all the signals saying sell, producers this fall will probably continue to sell heifers, keeping a lid on the size of the cow herd.
“I don’t think a guy’s silly to be selling at these levels,” Dunford said.
