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Cattle prices at record highs

By Mark Green

Kentucky’s 34,000 beef cattle farmers are enjoying their highest sales prices in history. Herd numbers, however, are at their lowest levels in a generation and restocking the state’s grassy, well-watered pastures will take years.

Until then, the supply and demand equation favors farmers.

“It’s a good time to be in the cattle production business,” said Kenny Burdine, assistant Extension professor in agriculture economics at the University of Kentucky.

Between USDA counts in 2007 and 2012, Kentucky cattle numbers decreased 16.2 percent to 1.01 million, the lowest since 1987. Rising beef prices that are now at all-time highs mean herd culling has continued the past two years.
Between USDA counts in 2007 and 2012, Kentucky cattle numbers decreased 16.2 percent to 1.01 million, the lowest since 1987. Rising beef prices that are now at all-time highs mean herd culling has continued the past two years.

Growing or getting into it, though, is another matter. Financial, competitive and demographic issues all argue against any quick Kentucky cattle drive, agribusiness experts say.

Record high market prices mean investment costs to increase production also have spiked, said Burdine, who regularly fields calls from operators assessing whether they can afford to expand now. Many of those cattle farmers are near or past retirement age with fewer young farmers interested in succeeding them. Meanwhile, rising grain prices have made row-crop farming so profitable that hundreds of thousands of former Kentucky pasture acres have been plowed into row-crop production.

“Once it converts to row crops, it’s unlikely to go back any time soon,” said Greg Halich, an assistant Extension professor of farm management in the University of Kentucky College of Agriculture, Food and Environment. Returning land to cattle operations would require big commitments of cash, time and risk.

Kentucky’s herd numbers decreased 16.2 percent to 1.01 million between the USDA Census of Agriculture counts in 2007 and 2012. That’s below the most recent low of 1.05 million cows in 2000. State herd numbers were last less than now 27 years ago in 1987 when the count came in at 997,000.

And herd sizes no doubt have fallen further. Retail ground beef is up 29 percent since the ’12 census, and rising market prices suggest continued hard culling the past two-plus years.

Kentucky has long been the biggest beef cattle state east of the Mississippi River and usually represents about 3.5 percent of national herd total. That proportion has not dropped.

Drought in the West juices up prices

The national cattle supply picture is worse. Overall U.S. herd numbers are the lowest they’ve been since the USDA’s National Agriculture Statistics Service began measuring in 1973. Some say it’s a 50-year low; others suggest it’s been more than 60 years since the nation’s beef cattle numbers were this low.

As of July 1, there were 95 million U.S. cattle and cows after years of culling driven first by difficult weather and accelerated by resulting higher market prices. Kentucky weather has been less ornery than in Western cattle states, some of which are in a fifth consecutive year of severe drought, but the national beef production and international marketing systems mean events in one region impact operators everywhere.

Prices rise everywhere when fewer cows go to market in Texas, whose herd size has shrunk by more than a million animals in the past five years.

U.S. cattle market prices continued to surge last month and on July 25 averaged $164-$166 per hundredweight, a $9 increase in one week, according to farmfutures.com. That puts the market price for a 1,200- to 1,400-pound cow at about $2,000 to $2,300.

Weaned calves are sold at the Bluegrass Stockyards facility in Albany, Ky., for backgrounder-stocker operations, a step in cattle production system that is popular among the state’s nearly 34,000 farms with cows.
Weaned calves are sold at the Bluegrass Stockyards facility in Albany, Ky., for backgrounder-stocker operations, a step in cattle production system that is popular among the state’s nearly 34,000 farms with cows.

Kentucky cattle sector watchers and participants do wonder about how the herd might be expanded, but they are happy about their current situation and the near-term outlook.

“I think it’s pretty optimistic and pretty positive. The product we have is a good one that people want,” said Dave Maples, executive vice president of the Kentucky Cattlemen’s Association. “The beauty of Kentucky is we’ve got grass, and we’ve got water. We’re blessed. Most of the time we’ve got pretty decent rain.”

Western states have had a general water shortage for decades, and it has been exacerbated by years growth and development despite low rainfall and drought. The prospect of water wars is openly discussed.

“I was in Colorado two weeks ago and that’s all they could talk about – water rights,” Maples said. He was told that Colorado, one of the states Kentucky cattle are sent to be finished for market, “has more lawyers dealing with water rights than anywhere else and (during that state’s history) more people have been killed over water than over gold.”

Drought sometimes dries Kentucky pastures, too. Burdine recounted a late spring freeze and near drought in 2007, severe drought in 2008 and very dry conditions in both 2010 and 2012. In each of those years, he said, weather’s impact on pastures and hay production for winter feeding caused state cow herds to be culled more heavily than normal.

 

On front end of cattle production system

Cattle operations in general fall into one of three segments:

• Cow-calf operations – These maintain herds whose goal is to produce calves, most of which are sold after weaning. Cows also go to market after producing for eight to 12 years.

• Backgrounder-stocker operations – These buy weaned 6- to 10-month-old calves at 300 to 700 pounds in late winter and put them on grass pastures until animals are either at full market weight of 1,200 to 1,400 pounds, which can take a year, or sell in late fall to “finishing” operations, most of which are in Western states.

• Feedlot operations – These buy cattle from backgrounder-stockers and closely manage final weight gain for four to six months to maximize market value. “Finishing” can be by grass or grain feeding or a combination; grain only operations can be quite compact.

A majority of Kentucky cattle operations are cow-calf and backgrounder-stocker, Burdine said, and sell animals for finishing to feedlots in Illinois, Kansas, Nebraska, Oklahoma, Texas and Colorado. Finished cattle are sold to meat processors. A significant community of “order buyers” in Central Kentucky purchase cattle to send west.

Most of the 34,000 Kentucky farm operations with cattle are on a small scale. The average herd size is 29.

“Historically in Kentucky farmers have always run cattle on land that has row-crop potential,” Burdine said.

That’s different than in other regions, where cattle operations more typically are larger and conducted on lands with lower quality soils not appropriate for grain production. And in Kentucky, whether for livestock or crops, farmers very often rent the land they work on.

Pastures plowed for high-profit row crops

The economics underlying land rental have shifted greatly in the past decade, however, as growing demand for grain, boosted by bouts of drought in Great Plains croplands, have increased row-crop prices and profitability.

Corn prices that were under $2 a bushel in 2005 were above $5 from early 2011 through late 2013 and more than $6 a bushel most of that time, according to NASS. Corn this year corn is back to about $4 a bushel.

Soybean prices went from about $5.50 a bushel in 2005 to more than $16 in 2012. In July, soybeans continued to average nearly $13 a bushel.

Commonwealth row crop operations have grown in size and profitability, in turn generating big increases in rents for property suitable for grain – rates much higher than cattle operations can support. Pastures with good deep soil are being plowed.

TotalUSBeefExportsBurdine said USDA figures show state corn harvest acreage increased 5 percent from 2007 to 2013 from 1.36 million acres to 1.43 million acres. Soybean acres harvested increased a whopping 60 percent from 1.08 million acres to 1.64 million acres. Year to year acreages in row crops vary due to rotation and other factors, Burdine said, but the numbers clearly show an increase in Kentucky grain operations.

“There’s been a sizeable shift,” he said.

“If I’m a grain farmer, profitability has doubled,” said Halich. “Cattle profits are higher than ever, but still not as high as for row crops.”

Cropland rent rates now run several multiples of rates paid for cattle pasture, according to the farm land value and rent survey that Halich regularly conducts across the state.

Land values and rents are highly variable from tract to tract depending on their quality and location, Halich stresses, but the latest survey found cropland rent on “good ground” ranged from $60 to $260 an acre. Cattle pasture rent on “improved ground” ranged from $35 to $70 an acre.

It again means the prospects for growing Kentucky’s herd are diminished, Halich said, because row-crop farmers can expand much more easily than cattle farmers and can afford to pay much higher rent for available land.

Managing grain lands is geographically easier also, he said.

Livestock farmers who want to expand operations can’t go as far from their home base, Halich said, because they need to physically visit an active tract every few days while a grain farmer can go more than a month without visiting a parcel.

More cows later? Less income now

Cattle operation expansion, he said, typically involved holding back from the market a young cow that won’t be “in production” for another year or two. And retaining that heifer in the current high-price means forgoing perhaps $1,400 in income. While a cow can produce eight to 12 calves – and incomes – in the coming years, there is no knowing what market prices will be, especially in the latter years.

“You must take and eight- to 10-year view,” Burdine said.

Despite the risks, the experts do expect Kentucky’s cattle numbers to grow again slowly in the coming years.

“There are opportunities for young people to get into the business,” Maples said.

Demand for beef and thus prices have steadily increased as the national and international economies have improved since the global recession in 2008. U.S. consumers have gotten more confident about their finances. In developing countries, entire new markets are coming into existence as people there move up the economic ladder – they can afford more and better food, and they want beef.

The United States is the world’s second leading beef cattle producer today behind Brazil. U.S. beef exports have quadrupled in the past decade and foreign demand is thought responsible for increasing domestic U.S. cattle prices more than 10 percent.

“The export market is so good,” Maples said. “A lot of that (U.S. market) price is from export demand.”

In May, the Meat Export Federation calculated that foreign demand added $279.39 to the market value of every cow sold in the United States. That was a record amount, up by $47 from May 2013.

As retail beef prices keep rising to never-before-seen levels, the cattle industry does wonder where the ceiling is.

“Consumers are still buying it at a higher price,” Maples said. “People have wondered if we’ve topped out, but because of supply and demand and droughts in other parts of the country, it still looks pretty good for the next two or three years” at least.

Small operations and big technology

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Retail beef prices continue to rise to never-before-seen levels.

Which leads him to believe Kentucky’s cattle numbers “will get bigger.” Cattle farming is profitable, “and there is still a place for the guy who’s got 15 head.”

The agribusiness trend in the state and across the nation is toward fewer, larger farms in all segments, including livestock, Maples agreed. However, he does not foresee Kentucky cattle operations becoming part of the huge agribusiness conglomerates soon.

“The thing is, with the cattle business Kentucky is mostly cow-calf (operations),” he said. “Most animals are out on grass, and these big companies don’t want to own land.”

Small operations can present affordable entry into the cattle business. Programs such as Young Cattlemen and Future Farmers of America have always helped recruit new participants, Maples said, and continue to evolve. Agriculture programs today teaches a range of business skills required to manage modern farms, he said.

Management of genetics, pastures, water, manure, equipment and more is computerized and high tech, Maples said. Animal tags are electronic. Markets must be monitored closely, and cattle can be sold in the futures market or remotely by video.

The state Agriculture Development Board, which has invested Kentucky’s tobacco Master Settlement Agreement money into a wide range of new agribusiness activities, also remains strongly supportive of traditional mainstays such as livestock operations.

Cattle and other agriculture operations can be good training for many business fields, and will continue to attract ambitious young adults, Maples said.

“Kids who come through agriculture (programs) have a good work ethic, and good business sense, and understand marketing and sales,” he said. “You can make yourself pretty saleable.”

Mark Green is editorial director of The Lane Report. He can be reached at [email protected]