After seven years of sharply lower returns to cow-calf production, cattlemen now look forward to 2023 with prospects for significant profits. Certainly, the herd liquidation driven by drought and economics for the past 2 years support that optimism. In fact, I believe we are looking at a 3% smaller U.S. cattle inventory at the beginning of 2023 compared to a year earlier which will result in a 7% year-over-year decline in cattle slaughter.
Both the inventory of beef cows and total cattle numbers will be the lowest since 2014. While cow-calf operations will see profits with reduced numbers, packer margins, for the first time since 2015, have now fallen into the red. Feedlot margins, though still well into the black, face the risk of high feed costs and high feeder cattle prices. The real question going forward is how much producers will be willing or able to expand herds.
As I analyze beef industry structure, I often think back when sitting with the rest of the cowboy crew in the bunkhouse and talking about how much things had changed over the years and how much they will continue to change. That was nearly 50 years ago and I had just graduated from college. Ranching and ranches have changed.
I was perusing through a real estate catalog this week and looking at ranch values (at least asking prices). When your ranch value increases from $900 per cow unit ranging now up to $20,000 per cow unit, the economics of grazing cows has changed and so has your ranch. You can still operate a cattle operation, but those ranches are sold to hunt trophy elk and fly fish - not raise cows! I am not arguing against the sales prices. I am simply saying those ranches are not purchased by cattlemen whose livelihood is raising cows and producing beef. But at the same, expanding an operation to gain economies of scale will face the same land values.
While the potential for solid returns to cow-calf operations continues to improve, the challenges faced by the entire industry and impacting every facet of beef production will change the industry. Your profit outlook is as much about land values, regulations, markets, and consumer demand as it is the price of calves or yearlings.
