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Agricultural News

A War of Attrition- A Look At What Record Cattle Prices May Mean

Tue, 17 Jan 2012 11:32:08 CST

A War of Attrition- A Look At What Record Cattle Prices May Mean Cattle prices are at record high levels and will push even higher in 2012 and beyond. According to OSU Extension Livestock Market Economist Dr. Derrell Peel, retail beef prices are increasing and will push higher but it is uncertain how much and how fast. These conditions ensure that margins for various sectors in between will continue to be squeezed and some sectors of the beef industry will face difficulties in the coming months.

Retail beef prices increased through the year of 2011 but it wasn't until the fourth quarter of the year that beef production dropped sharply. Anticipated decreases in beef production in 2012 mean that retailers will be challenged to keep retail prices on pace with boxed beef and live cattle prices. Retailers are always reluctant to increase retail prices too fast or too much and retail margins are likely to be squeezed in the transition. Packers have already faced limited margins as fed cattle prices increased faster than boxed beef prices. Packers experienced poor margins much of the fourth quarter of 2011. Packers have the additional challenge of not operating at efficient capacities in the face of declining cattle numbers. That challenge will increase as feedlot marketings decrease in 2012.

Feedlots face perhaps the toughest challenge of all. High feeder cattle prices and high feed costs will likely more than offset record fed cattle prices and result in negative operating margins much of the time for the foreseeable future. Feeder cattle supplies will continue to tighten and may decrease dramatically if the drought abates and heifer retention accelerates. Feeder supplies will be tighter in 2012 and may not reach the tightest level until 2013 or beyond.   

The U.S. beef industry has experienced chronic excess capacity in the cattle feeding and beef packing sectors for many years. Most of the existing feedlot and packing infrastructure was originally built in the 1970s and 1980s, a time when cattle inventories were 15 to 25 million head greater than today. Continued herd liquidation, especially since the mid 1990s has accelerated the pressure to reduce feedlot and packing capacity. Downward adjustments in industry capacity are a slow process and not much has changed yet. The drought in 2011 temporarily accelerated cattle marketings and postponed the coming crunch of tight feeder supplies but ensures that the crunch will be even more severe when it happens.   

Though the impact of continuing drought could once again change the timing of cattle flows to feedlots and packing plants, the squeeze in feeder supplies is likely to reach critical levels in 2012. The war of attrition on feedlots and packing plants will continue and will accelerate in 2012. Feedlots and packing plants will compete aggressively for ever declining animal numbers and contribute to even higher input costs until somebody finally exits. It may not happen in 2012 but the pressure will be even greater and it will eventually happen.

Our thanks to OSU Extension Livestock Market Economist Dr. Derrell Peel for today's analysis- as published electronically in the weekly Cow-Calf Corner that he and Dr. Glenn Selk release on a weekly basis.



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