Hesitant to Say 'Record' Cattle Prices, Expert Warns of Downside Risks
As the dust settles after the release of the recent cattle inventory report, it’s clear that the cattle herd took a major hit over the last 12 months with the lowest beef cow numbers since 1962 and the lowest total cattle herd in eight years.
In a recent “AgriTalk” conversation, Scott Brown, livestock economist, associate extension professor and interim director of the Rural & Farm Finance Policy Analysis Center at the University of Missouri, says, “We certainly got confirmation that we have fewer cattle and cows out there at this point. It just tells me we're going to get awful tight on cattle inventory as we look over the next 18 to 24 months at this point.”
Assuming the drought improves in 2023, creating improved pasture conditions and a sufficient corn crop, it’s possible that the cattle market and cattle feeding will be favorable towards the end of the year. It’s also possible that producers will shift to a build-back mindset, retaining heifers to increase herd numbers.
Brown also believes “the structure of the cow-calf industry will have changed coming through this round” of the cattle cycle—as some of the smaller, traditional operations bow out of production due to retirement and without the next generation to take over.
Nonetheless, with tight cattle numbers, high prices can be expected.
“The real spike in prices will come when we do start that rebuilding process and we do start retaining heifers,” says Derrell Peel, Oklahoma State University livestock marketing specialist, in a recent U.S. Farm Report discussion. "That's what squeezes slaughter in the short run, and we're not sure when that's going to happen. It still depends on the drought, but it could certainly start this year. It's either late 2023 or into 2024 when we get that real spike in prices.
However, Brown is hesitant to use the word “record” yet—noting the need for strong demand to go along with the weak supply to reach record prices. It’s important to consider the price of feed and other factors that may influence the prices feedyards are willing to pay for cattle, Brown adds.
As 2023 unfolds, is possible that the demand for cattle remains strong and producers retain heifers again—leading to a hole in beef production that could go even deeper, Brown notes.
“The things we face today seem like an unchartered territory,” Brown says. “I think demand for many of our ag products is becoming more inelastic—so very small changes in supplies get us from record highs to record lows and in short periods of time. I'm afraid that volatility is not going away anytime soon.”
While Brown believes the demand is there, he worries there’s the potential for downside risks—price of hay, future corn yield and prices—could greatly impact the producers’ bottom line in the coming months.&nbs;
How Much Risk Can You Afford?
“It's not one size fits all,” Brown says. “We have operations out there who are borrowing no money. They can certainly self-finance that risk side a lot better than those that are more highly leveraged. So, for those carrying more debt load, making sure that 2023 and 2024 are as positive for them as possible and using a little risk management might make sense.”
For example, livestock risk protection (LRP) insurance contracts might be a valuable tool to help minimize downside risk in the markets, Brown suggests.
Considering interest rates, hay prices and other inputs, producers face higher prices across the board—impacting their bottom line.
“The prices in 2014 that were record levels that generated years that I always said, ‘even Scott Brown can make money in the cattle business’ aren't going to generate the same level of profitability in 2023 and 2024,” Brown explains—there is simply more risk and more dollars out there on the input side of the equation.
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