Cost Challenges to Cow-Calf Producers

USDA’s Economic Research Service spelled it out last February.   In a quarterly report on farm income and costs, ERS said, “The current economic downturn has weakened beef demand, offsetting the positive effects of lower grain prices. Prices paid for feeder steers in 2009 are expected to remain almost exactly the same as in 2008.” ERS predicted cash receipts for cattle and calves in 2009 would move slightly upward to a nominal record high of $50.2 billion, but the weak demand would keep feedlots from increasing placements, and cow slaughter would continue to run above usual levels as producers cull cows to increase herd efficiency. In short, 2009 was expected—for the first time in a dozen years—to put many cow/calf operators in negative earnings territory.

And ERS’ 2008 “Cow-Calf Production Costs and Returns per Bred Cow” lays out the biggest changes. Feed prices were up 14% from the previous year; notably, concentrates and other feed were up 34%, and supplemental feed was up 45%. Fuel, lube and electricity rose 30%. And the value of all cattle sold? Down 4%.
 Tom Troxel, Extension beef cattle specialist at the University of Arkansas, predicted in January, “It’s going to be a very difficult year financially for cow/calf producers. I think you’ll see the selling price for weaned calves will be lower in 2009 than it was in 2008, and we all know what production costs have done in the last year or so. Although we have seen some reprieve on fertilizer cost and fuel cost and feed cost, all three of those, they’re still relatively high and there’s a major impact.” He said producers need to get back to basics, doing what they know works well, and is based on scientific research.
Darrell Peel, Oklahoma State University Agricultural Economist, says while it will clearly be a narrow profit year, much of that will depend on the individual operation. “Since last fall,” he says, “we’ve been very concerned about the weakness on the revenue side, if you will—the weak cattle prices, and that’s certainly still a bit of a concern.” But there’s been some recovery, and Peel says he’s more optimistic on prices for the second half of ’09, when many weaned calves will be marketed.
The cost end, though, is another matter. Feedlot operators experienced “sticker shock” in 2008 when grain prices soared well above previous record highs; Peel says since then, they’ve adjusted to the new paradigm. “There’s an opportunity for these markets to stabilize and to see some positive margins returned,” he says. “But I think we’ll also continue to be exposed to considerable risk, short-run kind of volatility in those markets, that will continue to provide a lot of challenges to that sector.”
The high price of grain, of course, limits what feeders are willing to pay for calves. That’s left producers unable to take advantage of the forward pricing arrangements that can provide stability to the market. “Ido think that will improve a bit over time,” Peel says, “but we’re really not there right now.” Eventually, he believes producers will be able to return to using futures or cash contracts to lock in returns; knowing that information, they can then turn to the other side and price inputs to ensure profitable margins.
The story every year for cow/calf operators is grass, and Peel says that situation is relatively strong. Although there’s regional variation, he says, “Fundamentally, we really don’t have any major drought areas in the country right now, and that sets the stage for everything else.” Texas and western Oklahoma suffered severe drought earlier this year, but spring rains have caused the area and intensity to recede. “I wouldn’t say we’re out of the woods yet,” says Peel, “but we’ve certainly made a lot of progress on that.”
Peel also says the persistent drought that has lingered over the Southeast for several years appears to have abated, although he cautions, “We’re just going into the hot part of the year. Beyond that, I’m not aware of any major regional deficits on hay supplies; I don’t know that we have an excess of supplies, but I think everybody has gotten through the winter in pretty good shape and I’m not aware of any major shortages that are causing any real problems.”
USDA’s monthly price for hay in April was $129/ton; that’s still well above the five-year average, but down 12% from April of ’08. Prices in May of ’08 spiked to a record of $168/ton, mirroring the surge of grain prices to all-time highs as traders became increasingly concerned last year’s spring flooding would leave Midwestern farmers unable to meet demand from livestock producers, exporters and the growing U.S. ethanol market. Peel says feed remains the cattle producer’s greatest expense; using raised forage as effectively as possible, and managing purchased feed to supplement it, are the greatest challenge.
Many producers will have to catch up on fertility. Nutrients, like grain, soared to record prices last year; between April ’07-08, nitrogen prices rose 32%, potash doubled, and phosphorus nearly doubled. As a result, Peel says a lot of producers “just basically chose not to provide fertility”; in some cases, they were able to get away with it because they had reserve fertility in the soil. But they can’t do that two years in a row…and they really shouldn’t have to; nitrogen prices have fallen back to mid-2007 levels.
Peel points out failure to catch up on needed soil fertility can affect not just the quantity of forage produced, but the quality. He says,   “I do hear some anecdotal indications from producers that they see some impacts on reproductive performance in cow herds that probably is related, if not to actual fertility, to just the consequences of drought and in some cases excess forage growth following rainy periods. There’s been a lot of variation in nutrient quality of these forages, and the challenge there is to make sure that that doesn’t translate into loss of reproductive efficiency in the cow herd.”
For now, though, he believes herd productivity is in pretty good shape, although the average cow age is a little younger than usual; he says producers appear to have replaced cattle as needed. The droughts that moved all over the country throughout this past decade kept the herd in the liquidation cycle; the check on herd size helped maintain the unusually long stretch of profitability, up until high input costs kicked in two years ago and took the profit out of the business.
Now, says Peel, “I think for cow/calf producers—it’s always true but it’s even more true at this point in time—you’ve got to manage that cost side, relative to our expectation for prices. Ultimately, at the end of the day, you can’t do much about markets; you certainly want to monitor them and anticipate where they’re headed, but the thing you can really control is the cost side.” The two big issues, he says, are the overall cost of production, and the potential for an extraordinary run up in short-term expenses—especially once the national economic recovery begins in earnest.
And Tom Troxel offered this analogy: “I think 2009 and 2010 both will be challenging years for the cow/calf producer; I kind of look at a cow/calf producer like a manager of a professional baseball team. You think about what a manager of a professional baseball team does, and he tries to make the right decisions to give his team the best chance of winning. He can’t hit the ball; he can’t throw the ball. But he brings in that left-handed reliever at the right time, or brings in a pinch-hitter at the right time, to try to put the odds in his favor of winning. And that’s what I think cattle producers have to do in 2009 and 2010, is to position their ranch so the odds are in their favor of being profitable.”