Economist sees beef output cuts if production costs remain high

MANHATTAN, Kan. — Soaring grain, oilseed and land prices helped bolster some rural Americans’ incomes over the past year, but livestock producers have not reaped such gains.

“Feed is the largest single cost item for livestock and poultry production — accounting for 60 to 70 percent of the total cost in most years,” said Kansas State University agricultural economist James Mintert.

“Although energy, labor and other inputs have increased over the last two years, feed costs have jumped 40 to 60 percent, depending on whether a producer is feeding swine, cattle or poultry.”

Corn

Mintert said corn prices at Omaha, Neb., for example, averaged $5.44 a bushel for the January-June 2008 period — a $3.44 or 173 percent increase over the $1.99 per bushel average set in January-June 2006.

Plus, peak cash corn prices topped $7 a bushel this year in late June and early July.

“The rising costs of production have largely been absorbed by livestock producers so far, but that cannot continue indefinitely,” he said. “Ultimately, higher prices throughout the marketing chain will be required to offset the large increase in production costs.”

Beef

The beef industry is feeling the pinch just like all livestock sectors. A monthly survey of feedlots conducted by Kansas State’s Department of Animal Sciences and Industry indicated the cost of feeding cattle in commercial feedlots averaged 74 cents per pound in 2007, up from 54 cents in 2006.

Preliminary estimates indicate cattle feedlots’ costs of gain could average near 85 cents a pound in 2008 — an increase of 58 percent in two years. Cattle feeding returns estimated at Iowa State University show that cattle feeders experienced the largest loss on record — $167 per head during February — that producers have had since modern records started being kept in the 1960s.

Cow-calf

Similarly, production costs for cow-calf producers have jumped, mostly due to feed costs.

According to the Kansas Farm Management Association, its cow-calf producer members’ feed costs rose to $346 in 2007, up 21 percent from $287 in 2006.

“Recent feed grain and protein supplement prices, along with a sharp increase in forage production costs, indicate that total feed costs will rise again in 2008, likely exceeding $400 per cow,” Mintert said.

“That would be an increase of 40 percent or more in just two years.”

The Kansas Farm Management Association data indicates that returns for Kansas beef cow-calf operations still exceeded production costs in 2007 by about $50 per cow. But, the overall anticipated rise in feed costs during 2008 “will almost certainly push returns below variable production costs,” Mintert said.

Cattle

It’s important to note that the losses experienced in the cattle sector were not associated with large cattle price declines,” Mintert said. “In fact, prices for market-ready cattle in Kansas were record-high in 2007, averaging $93 per hundredweight (cwt) or 8 percent higher than in 2006. So, the reduced profitability was directly attributable to rising costs, especially feed costs.”

Higher beef prices from stronger U.S. demand seem unlikely over the next few years.

Beef demand has been weakening somewhat since 2004, Mintert said.

“Consumers’ disposable income is a major determinant of their demand for beef. Slow or even negative growth in the U.S. economy during 2008 and 2009 will mean little likelihood in the short run for an increase in domestic beef demand,” he said.

BSE

A bright spot in the beef outlook is that export demand has improved since plummeting in 2004, following the report of the first U.S. case of bovine spongiform encephalopathy (BSE).

During January-May 2008, for example, U.S. beef exports to all destinations were 32 percent larger than during the same five-month span in 2007.

Even so, exports still are not close to where they were prior to the BSE discovery, Mintert said. He cited data showing that U.S. beef exports during the first five months of 2008 were 34 percent below the exports for that same period in 2003.

“Based on the trend established early this year, U.S. beef exports in 2008 could total 6 to 7 percent of beef production — which effectively reduces the supply of beef available in the domestic market and hence supports beef and cattle prices,” he said.

Added to current exchange rates, that will continue to boost U.S. beef exports and discourage imports, but it’s unlikely to be enough to offset the dramatic rise in production costs.

“If beef demand — especially export demand — does not increase enough to boost beef and cattle prices high enough to offset the rise in production costs, the industry will shrink in size to the point that fewer pounds of beef are marketed to U.S. and international consumers,” the Kansas State economist said.

“The magnitude of the supply shift will depend on how rapidly beef exports recover and on whether feed grain prices continue to increase or they stabilize at current levels.”

Mintert noted that some U.S. beef herd reduction was already under way in 2007, with the beef cow herd down about 1 percent.

Slaughter data through early July 2008 also suggests liquidation is under way and, in fact, may have accelerated since January.

“Looking ahead, the U.S. beef industry could be facing several more years of herd reduction before prices rise sufficiently to offset the new production cost regime,” he said.