Declining cow-calf margins slow expansion

Prime Cuts with Steve Kay from the November 2016 issue of Canadian Cattlemen

Cow and a Calf

The cow-calf sector is the nursery of the North American beef industry. What happens on the ranch determines whether the industry will expand or contract. This then determines what happens all the way to the retail meat case or the restaurant menu.

Cattle numbers in recent years have shown different patterns north and south of the border. Total Canadian cattle numbers have remained stagnant. They crept up to 12.3 million head in January 2013 but have since receded to just below 12 million head and look set to stay at that level for some time. In contrast, total U.S. cattle numbers bottomed in 2014 at 88.5 million head, the smallest total since 1952. They have increased sharply since then, up 3.5 million head by January 1 this year to 92 million head.

Forecasting future growth is tricky, particularly as market and pasture conditions can change quickly. USDA’s long-term forecasts have U.S. cattle numbers increasing every year to 2025 to 97.4 million head. Private forecasts are much more subdued and look for numbers to peak in 2019 at around 96.5 million head.

Even this seems optimistic in light of the rapid deterioration this year of U.S. cow-calf producers’ returns. Producers have enjoyed an almost unprecedented run of positive margins until now. As measured by the Livestock Marketing Information Center (LMIC), margins peaked in 2015 at a record $500-plus per cow. LMIC’s calculations include the margin above cash costs of production plus pasture rent but not operator management cost, labour, etc.

LMIC calculated 2015 average margins to be $300 per cow. But it has been ratcheting back its estimates throughout this year as forecasted calf prices were lowered. Its latest estimate for 2016 is a return of just over $70 per cow. This will be the lowest margin since 2012’s returns, it says. Economic incentives for beef cow herd growth have quickly slipped away. So the rate of breeding herd growth may dampen significantly during 2017, says LMIC.

Calf prices have declined significantly this year compared to last year because of increased supplies and because cattle feeding returns remain mired in red ink. This sector in 2013-14 had its second-best period ever of positive margins. But returns deteriorated dramatically in 2015, and caused the worst ever year for margins, according to LMIC. This year has been little better. LMIC’s returns estimated for steers sold in August were in the red again. This was the third consecutive month of estimated losses. Only two months this year have seen sale prices well above break-even cost levels, it says.

September returns were also likely to be negative after cash live cattle prices fell as low as US$105.02 per cwt live (basis USDA 5-area steer price) the week ending September 11. This was 24.5 per cent below the same week a year earlier. The next week’s $4-5 rally still left prices nearly 11 per cent below last year.

The beneficiaries of these price declines have been fed-beef processors, retailers and consumers. Packers in the second quarter enjoyed their largest operating margins since 2010, according to data from Their third quarter margins were expected to be the largest since either 2008 or 2003, and were touching US$100 per head in mid-September.

Retail beef margins have been strong because of a sharp year-on-year decline in wholesale beef prices. Retailers, though, have faced the dilemma of lowering their prices through more aggressive feature activity and not seeing volume sales increases to offset the revenue decline. This began to change in mid-September, as consumers stepped up their beef buying in the grocery store.

About the author


A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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