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Northwest Iowa Dairy Outlooks

A local discussion of current science and issues concerning dairying in northwest iowa

Glen Tonsor, agricultural economist at K-State noted in a recent intervue with Meatingplace that U.S. cattlemen can expect high cattle prices to continue through 2011. Here is a recap of the comments that I thought most interesting.

-Given low heifer retention (down 5.4 percent as of Jan. 1, 2011, relative to 2010) by cattlemen, the tight supply aspect of current markets is expected to persist through 2012. This leads me to expect aggressive bidding by feedlots, providing staying power for feeder cattle prices. Similarly, while notably volatile, the historically tight supply-to-use situation of the corn markets would appear to likely continue into 2012. The corresponding outlook for fed cattle prices depends on the ability to pass along higher costs of production to consumers. Domestic beef demand strengthened as we moved through 2010. The ability to continue this trend is being questioned as consumers face historically high retail prices. (You can access demand indices Tonsor maintains by clicking here.)

-The over-capacity of feed yards and slaughterhouses will not erode immediately and likely will result in continued aggressive bidding. More narrowly, I expect both industry segments to bid cattle up to prices that may exceed those of typical break-even calculations. This behavior is rational if operators can cover all variable costs and still make some contribution towards those fixed costs associated with today’s excess capacity.  

Most signs are for recent gains in beef exports to persist through 2012. This, of course, hinges upon global economic growth, exchange rates, and a host of other less obvious factors. Among those ‘other factors’ worth considering is the comparative position of the U.S. cattle industry relative to other major beef exporters competing for export market share. Developments by key importers (for example, South Korea now requires all imported meat to be traceable) and key exports (for example, Canada is developing a national system to more widely facilitate age verification) may result in the U.S. losing ground to other countries. The timetable of these events influencing U.S. exports is hard to forecast. Nonetheless, this and related issues deserve serious thought as the U.S. industry increasingly depends on export market maintenance and expansion.

The decline in U.S. beef imports has occurred largely as exchange rates have adjusted, making imports more expensive. One result of this was notably higher cull cow slaughter volumes throughout 2010. If and when the domestic herd begins to expand and cull cow slaughter volume is reduced, additional support for beef imports may develop as domestic supplies will be further reduced during the adjustment period of fewer heifers being fed.

The observation of expected profits around $100/cow for the representative cow-calf producer suggests few producers will face new market pressure to “sell off cows” in coming months. That being said, cow-calf producers may face an opportunity to sell cull cows at values unprecedented. Producers may well seize this opportunity.

More broadly, the historically high cattle prices are subject for notable optimism in many cattlemen discussions. The associated volatility with these higher prices signals unwanted risk to some and presents desirable opportunities to others. Cattlemen concerned that a “bubble” may be forming could consider implementing price risk management strategies such as hedging with futures or options contracts. Conversely, cattlemen more comfortable with increased price volatility may rationally elect to “ride the markets out.” The net tone of these two camps of sentiment drives observed risk management strategies that are (or are not) implemented.

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