An old saying goes something like this: "When things are not going well, watch out, and when things are going well, watch out more."
From a market perspective, a host of factors have things going well for cow-calf producers.
• Cattle inventories are the smallest in more than 60 years, severely restricting feeder cattle available to place and keeping feeder cattle prices at lofty levels.
• Nationally, feedlots have surplus bunk space. Feedlots lose less by operating at capacity as long as revenues cover variable costs and leave something to apply toward fixed costs. That fuels competition to buy feeder cattle.
• Feedlot managers do not like to see empty pens. Their psychological desire to fill pens further intensifies competition to buy feeder cattle.
• Beef profits entice cow-calf producers to retain heifers to expand cow herds, which further tightens feeder cattle supply.
• Corn prices retreating from earlier drought-induced highs trim costs to feed cattle. Feedlot managers have a long-standing propensity to bid feed cost savings into feeder cattle prices.
• Porcine epidemic diarrhea virus has kept supplies of competing pork lower than they could have been.
• Despite ample chatter about how rapidly the broiler industry can turn an egg into a chicken breast, boosting the broiler breeding flock to get the eggs to hatch to up broiler output takes a bit longer.
• Rising incomes in Asia, particularly China, bolster US meat exports
Those factors all suggest stock cows and calves will remain valuable property for the foreseeable future. Optimists see nothing but blue sky from now on, which lures cow-calf producers to up output. Still, the earliest producers can put more beef on dinner plates is 2016. Doing so by then could well turn out to be a stretch.
Huge uncertainties spell more risk. As a result, cow-calf producers need higher expected profits to justify herd expansion. Some considerations are:
• The challenging decision as to whether to retain heifers to generate potentially higher, but unknown, income later vs. selling them to feedlots and taking a sizable, and known, amount of cash now.
• How 2014 and 2015 crops develop, which will guide costs to finish cattle and, in turn, determine how much feedlots are willing to pay for feeder cattle.
• Grazing conditions will regulate the rate of heifer expansion and cull cow sales to determine herd expansion. Good grazing would entice cow-calf producers to hold more heifers, further tightening near-term feeder cattle supply and buoying prices. Eroding grazing would divert heifers to feedlots. That would up intermediate beef supply, but make supplies even tighter in the out years.
• Competition from pork and broilers is certain to rise.
• Spring cow-calf pair prices knocked on the $3,700 door. Now is a good time to own cows. Whether now is a good time to buy cows is a different proposition. Just as feedlot operators have a strong propensity to bid their expected cattle feeding profits into feeder cattle prices, cow-calf producers may have an equally strong inclination to bid expected feeder cattle profits into cow prices.
• Those same forces bid up prices and rents of grazing land. Fixed costs are slow to retreat when prices sour.
• When and how strongly consumers may push back against high prices is unknown.
• Events such as last year's beta-agonist use controversy or the 2012 lean finely textured beef media debacle are nearly impossible to predict.
• Trade deals matter. A BSE-type event can disrupt exports overnight.
The bottom line
Producers can manage the things that might go wrong if they can anticipate them. Not so with unexpected upsets, which leads us to another old saying, "The only true risk management strategy is to have something stashed away in the sock."
Producers who are long on equity and short on debt are best positioned to weather the tough times that are bound to come.