A Few Thoughts by John Nalivka – Margin outlook for cow-calf producers
Most analysts, observers, and most importantly, cattlemen seem to be on the same page regarding a positive outlook for cattlemen’s P and Ls over the next 12 to 24 months. Before I continue with a few comments on this topic of margins, I do think it is important to restate one important tenant when discussing beef industry margins – averages for cattlemen, feedlots, and packers do not exist and that’s because of widely varying circumstances that affect those margins. Having made that qualification, let’s look at the factors supporting margins as well as what I consider to be the important areas of concern.
Cattle numbers will continue to decline. We all know that fewer cattle have always supported higher prices. The risk – grain prices are the highest level since 2013 in response to strong export demand – largely driven by China as they build their pork industry back following African Swine Fever. Speaking of exports, U.S. red meat exports continue to lend significant support to demand. I would also add China will not and cannot forego food security as there are 1.4 billion consumers living in a communist government. There isn’t much conversation about food security in the U.S. – an indication of how good we have had it for decades.
High grain prices limit feeder cattle bids. That is nothing more than managing feedlot breakeven prices – risk management. So, as a function of supply, there is likely support for higher feeder cattle prices, but the limiting factor will be cost of gain.
While I brought up grain prices first, the other critical factor is forage and that nasty word, drought, remains on the forefront of the outlook for both grain and forage. A look at the recently-released USDA drought monitor illustrates the current and significant problem in the southwest and the foretelling problem in the Plains states. This situation if it continues to develop, portends higher grain prices, but also stepped liquidation of cattle herds. Cattle numbers have declined largely as a result of economics. Tight forage supplies will become the primary driver into 2021. Aside from feed, inflationary pressure on other primary operating costs are also about to begin to notably increase, i.e., fuel and labor.
My forecasts calf, feeder cattle, and fed cattle prices for the remainder of 2021 assume a tighter supply of cattle into late 3rd quarter and into the 4th quarter without significant drought-driven herd liquidation in late spring – summer. This would leave calf prices for all of 2021 7% higher than 2020, feeder cattle for all of 2021 3% higher than a year ago. My estimate of cow-calf cash operating margins – hovering around $125 per head. Remember when a $100 bill above cash costs for each calf sold wasn’t a bad year?
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