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US Rancher Profits 'Bloom'

13 January 2015

US cow/calf operations have not had it so good in decades and will continue to see strong margins over the coming years.

This is because of high feed price and drought conditions in prior years, causing producers to reduce beef cow inventories as production costs spiralled, says a Purdue University economist. 

Heifer retention is not expected to yield "meaningful increases" for several years - Professor Mintert

Professor James Mintert writes that liquidation of breeding cattle occurred to a level not seen since the 1960's, although fortunes have changed and now it is time to expand. 

Record retail, slaughter and calf prices in 2014, accompanied by "sharply" lower feed grains and better forage availability will convince many that expansion is possible. 

The key to changes in future beef supplies and prices will be determined by the cow-calf production sector, writes Professor Mintert.

How it Looks Going Forward

Profitability and availability of forages drives cow-calf producers' expansion decisions. Production costs for cow-calf producers declined in 2014 compared to 2013 and could decline again in 2015 with normal weather conditions.

Lower costs and sustained record high calf prices mean a dramatic turnaround in profitability for the sector. The improved profit picture is encouraging some producers to begin holding back females leading to a gradual rebuilding of the nation's beef cow herd.

However, female retention this year and next is not expected to produce meaningful increases in beef supplies for several years. The real impact of herd expansion will not be felt until 2017 and beyond thus resulting in sustained cow-calf profitability through the latter part of this decade.

The cattle feeding profit picture has also improved dramatically during 2014 with the increase in profitability attributable to both record high slaughter cattle prices and declining feed costs. Cattle feeders are margin operators that benefit from reduced feed costs, but their costs for replacement cattle are surging and so cattle feeding margins will tighten appreciably in 2015.

Economy to Consider

Longer term, profitability in the cattle sector will be determined in part by the strength of consumer demand in the face of record high beef prices.

An improving U.S. economy is supporting domestic beef demand with the beef demand index on track to post a strong year-to-year increase in 2014.

Tight supplies and record high retail beef prices could lead to modest declines in beef export volume the next couple of years. In the longer term, export prospects will be tied closely to consumer income growth in importing nations. If consumer incomes continue to grow in key importing nations, beef export growth will resume, but not until U.S. beef supplies start to increase.

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