Cow-Calf Corner: Cattle market fundamentals clearer with improved drought conditions

Source: “Cow-calf Corner”

by Derrell S. Peel, Oklahoma State University Extension livestock marketing specialist

Through much of the winter, uncertainty about continued drought in major beef cattle regions contributed to uncertainty about cattle industry supply fundamentals. Would 2012 be another year of drought forced liquidation, like 2011, or can the industry get back to responding to growing market signals for herd expansion? This question has significant implications for cattle markets in both the short run and the long run.

The data indicate that heifer retention began in 2009. Despite smaller Jan. 1 heifer inventories, a higher percentage of available replacement heifers were utilized and the number of heifers entering the herd increased. The trend continued in 2010 with another increase in the number of heifers entering the herd, despite a smaller inventory of replacement heifers.

Despite continued net national liquidation, by January of 2011, solid indications of herd expansion were in place in several states, mostly in the Northern Plains and Rocky Mountain regions. The Southern Plains drought of 2011 resulted in significant reductions in heifer retention despite continued growth in beef cow herds in more states in other parts of the country.

The Jan.1, 2012, inventory of beef replacement heifers was 1.4 percent higher than the previous year, setting the stage for more heifer retention…if drought conditions permit. It now appears that drought is unlikely to cause significant additional forced liquidation and thus it will be other factors that determine how much and how fast heifer retention occurs in 2012 and beyond.

While active drought is unlikely to cause additional liquidation, the aftermath of the drought with respect to the amount of damage to pastures and rangelands and the time required for recovery is still quite uncertain. While the amount of heifer retention in the drought areas is likely to be limited in 2012, continued or accelerated heifer retention in other areas is likely to result in an increase in the number of beef heifers entering the herd in 2012.

Although heifer retention began in 2009, beef cow herd expansion has yet to begin because high rates of beef cow culling have more than offset increased heifer placements. 2011 was the fourth consecutive year of high cow slaughter rates that have contributed to net herd liquidation. High cull cow prices, driven by a strong hamburger market since late 2008, combined with the drought enhanced slaughter in 2011, have so far prevented net national herd expansion. Improved drought conditions allows for the possibility of the level of significantly reduced cow slaughter that will be necessary to stabilize and eventually increase the beef cow herd. However, strong slaughter cow values will continue to pull cull cows into the meat market and temper the level of cow slaughter decrease.

Net national beef cow herd expansion is not likely in 2012, or at most, a fractional increase. Herd expansion is likely to continue in some regions but herd rebuilding in the Southern Plains is likely to be very limited due to the need for grazing deferment to allow for pasture recovery. Given the number of replacement heifers available, a roughly 20 percent year over year decrease in beef cow slaughter will be needed in 2012 simply to stabilize the beef cow herd at current levels. Such a decrease is possible, but will be a challenge.

Through the first 10 weeks of the year, beef cow slaughter is down about 1.5 percent. Beef heifer retention is likely to accelerate in 2012 to support modest herd expansion in 2013. This emphasizes that the squeeze of tight feeder supplies will accelerate in 2012 and is likely to be even tighter in 2013 and 2014.

Though the cattle industry supply situation is somewhat clearer now than for many months, many market questions remain. First, drought is still a major problem in some areas and could redevelop quickly. That threat is never very far away. The continued upward pressure on cattle and beef prices that result from ever tighter feeder cattle supplies and projected declines in beef production make the demand question increasingly paramount. Continued U.S. economic recovery, the competing meat situation and trade impacts will all play a role in how much and how fast wholesale and retail beef prices can adjust to the higher levels implied by the supply situation. With drought mostly out of the way, at least for now, the clock is started on what will be a slow and long process of herd rebuilding for the next 4-6 years.

“Cow-calf Corner” is a weekly newsletter edited by Dr. Glenn Selk, Extension cattle specialist Emeritus at Oklahoma State University with contributions from additional OSU Extension specialists.