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Profitable U.S. Cattle Producers Staying Small

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We are seeing more culled cows going to market than we ever have. So we are seeing more liquidation.”

MARK SMITH

KANSAS LIVESTOCK ASSOCIATION

For the first time in years all levels of the U. S. beef cattle industry are enjoying healthy profits, largely because the nation’s smallest herd in 50 years is keeping cattle prices high.

Producers have traditionally used such profits to rebuild herds. But with global economies struggling, consumers fearful about jobs, and demand for beef likely to remain flat, cattle ranchers like the idea of staying small.

For at least the next two years consumers, restaurants and food service companies can expect little price relief for their favourite steaks, roasts, and filets, as there should be little or no increase in beef production.

U.S. beef companies like Cargill Inc., Tyson Foods Inc., JBS and National Beef Packing Co. will continue to compete for fewer cattle.

The contraction of the beef herd began several years ago, in reaction first to high feed prices and later to the recession which slowed beef sales globally.

Due to breeding cycles, it takes at least two years to increase a cattle herd. But most cattle producers, pessimistic about the economy, have yet to commit to herd growth.

“There is not a great deal of optimism out there,” said Darrell Mark, an extension economist at the University of Nebraska.

While economists suggest the recession is waning, recent gyrations in the stock market and the debt problems in Europe appear to be discouraging even the most optimistic cattle producers from expanding herds.

As a result, profits that would normally go toward raising more cattle are now being spent to reduce debts, mend fences, fix barns, replace equipment and fertilize pastures.

Breeding stock to slaughter

The first sign of herd expansion would be the retention of cows to produce the calves that grow into beef cattle, and government slaughter data shows that is not occurring.

So far this year producers sent 1.364 million beef cows to slaughter, well above the five-year average of 1.141 million, said Rich Nelson, analyst at Allendale Inc.

Beef cow slaughter in May exceeded the five-year average by 22 per cent, according to U.S. Agriculture Department data.

While a pessimistic view of the future is one reason to sell off breeding stock, another is profitable prices.

Cows and heifers are bringing in much more money now than a year ago, because the smaller herd and less imported beef have prompted beef companies to pay more for cattle.

In Kansas, adult beef cows are bringing $700 to $800 at livestock sales, up from $450 two years ago.

“We are seeing more culled cows going to market than we ever have. So we are seeing more liquidation,” said Mark Smith, a Kansas cattle rancher and president of the Kansas Livestock Association.

Ethanol and high feed prices

Cattle producers also remain worried that feed grain prices, particularly corn prices, could speed higher again.

Corn prices sped to almost $8 a bushel in the spring of 2008 due to late planting and increased demand from ethanol refiners who turn corn into fuel. At that time cattle producers were accustomed to $2.50 to $3 corn, and the jump to nearly $8 hit bottom lines hard.

While corn has since settled down to about $3.50 a bushel, producers remain fearful of another price increase.

Washington is expected to decide in the next few months whether to increase the ethanol blend in gasoline to 15 per cent from the current 10 per cent, and cattle producers are worried that a higher blend could again send feed costs higher.

“When ethanol came and corn prices went up it took about $150 per head away from the cow-calf producer,” Dave Scott, a Texas rancher and president of the Texas and Southwestern Cattle Raisers Association, said of the 2008 surge in feed prices.

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