Calf profit margins decline, but will still be evident | TSLN.com

Calf profit margins decline, but will still be evident

Troy Applehans
CattleFax Market Analyst

Cow-calf producers have benefited significantly from the bull market environment the industry experienced in 2013 and particularly in 2014. And, contrary to historical longer-term seasonal patterns of the market, the previous two years paid producers to wait as long as possible to market the calf crop.

The cattle industry and markets are seemingly pointed toward re-joining the historically traditional 10-12 year cattle cycle. The ebb and flow of expansion eventually impacts prices to the degree that profitability is difficult to achieve – forcing a percentage of producers out of the business or to the comprehension of utilizing their land and resources for an entity potentially more profitable. Traditionally, this takes 4 to 5 years from the price highs for prices to deteriorate to levels where producers find it no longer economically feasible to continue to operate in the same manner they have been. At this point in the cycle herd liquidation begins to occur. Shortly after prices begin to increase, but not quickly enough for producers to have the economic incentive to begin rebuilding. Eventually the industry finds itself at a point similar to 2013-2014 where the sustained period of dwindling supply accelerates prices to levels where the economic incentive to once again expand the herd takes place. Drought or lack thereof, however, has dramatic effects on herd rebuilding and liquidation.

Calf profitability this fall is still going to be evident, despite the significant recent downturn in prices. Remember, there is a seasonal surplus of supply of calves in the fall of the year, the majority of which are not placed against a very favorable timeframe in the fed cattle market – the summer months of the following year. This in and of itself typically limits calf values. Add to that a larger calf crop of almost 2 percent in 2015, which will allow buyers to be more discerning.

The recent rapid downtrend in the futures markets has done significant technical damage and impacted the cash cattle trade. The fed cattle market significantly impacts the other cattle weight categories and the correlation between price movement of the fed market and feeder cattle and calf values is very high. The bottom line is this…the fed cattle market will need to see strengthening values before the calf and feeder cattle markets will turn higher. The deferred feeder cattle and live cattle futures markets will also need to strengthen. Feedyard losses are substantial at the present time and cattle feeders will need to see a light at the end of the tunnel before they are willing to pay more for replacement cattle.

Bottom Line: All cattle segments saw a significant, and likely, long-term high in the market in the fall of 2014. The trickle down impact from the fed cattle price deterioration is presently negatively impacting calf and feeder cattle values. The overall market trend continues to suggest cow-calf operators will continue to be profitable the next several years, albeit with diminishing margins. Forward contracting calves during the summer months for fall delivery is expected to pay dividends. F