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Kay’s Cuts: US herd rebuilding is still absent

Steve Kay, 08/09/2014

A monthly column written exclusively for Beef Central by US red meat industry analyst and commentator, Steve Kay, Cattle Buyers Weekly

 

Steve Kay 1 (2)YES, the bubble that set record high cattle and wholesale beef prices in the US has burst.

The latter have fallen sharply since their late July highs. US grainfed cattle prices have also declined but by not as much. So American cattle feeders are still making excellent profits, in a run that is likely to extend into early next year.

These profits mean US cattle feeders are likely to continue to pay top dollar for young replacement animals. This in turn means cow-calf producers are likely to keep selling more heifers than they retain for herd rebuilding.

After waiting two years for signs of rebuilding, the industry might have to wait at least another year. This would mean cattle feeders and fed beef processors aren’t likely to see increased numbers until 2017.

US producers at the start of last year said they intended to retain 100,000 more heifers than the year before. But all those disappeared into feedlots by mid-year.

Producers at the start of this year said they intended to retain 90,000 more heifers. But many of these ended up in feedlots in April and May, says analyst Shawn Walter of Professional Cattle Consultants. He does not expect to see any more replacement heifers show up in the beef cow herd by January next year. Nor will there be more beef cows for a year after that, he says.

Several factors have blunted producers’ enthusiasm for expanding their cow herds. Much of Cow-Calf Country has recovered from the ravages of a 2011-2012 drought. But pockets of drought remain and producers are concerned drought might return at any time.

Calf and feeder cattle prices have been record-high all year, encouraging producers to sell rather than incur the considerable expense of carrying a heifer.

In some instances, producers prefer to buy a bred heifer from outside than retain their own. This is evident from the stratospheric prices that quality bred heifers have sold for in the US in recent weeks. They have fetched as much as US$4000 each, twice what they might have only a year or so ago.

Risk aversion

In addition, producers are being more conservative than in previous cattle cycles. They are more risk-averse, the cost of borrowing is much higher and some want cash now to help prepare for their retirement.

Another refrain is: My per cow returns are the best I’ve ever seen. Why would I want to risk lowering them by expanding my herd?

Imported cattle

The US in past years has relied on a steady flow of cattle from Canadian and Mexico to swell numbers in feedlots and packing plants. Some years saw as many as 2.5 million imported cattle. This and the extensive exports of US beef to both countries made the industry truly North American in nature.

However, implementation of country of origin labelling (COOL) challenged this concept and has impeded the flow of imports. The numbers entering the US so far this year are up on last year. But assuming the same monthly flow of the first eight months, the 2014 total might be only 2.1 million head.

The battle between the US and Canada and Mexico over COOL through the World Trade Organisation now appears to be heading to a denouement that could be far more injurious to the US industry than any decline in cattle imports.

A WTO panel has reportedly ruled largely in favour of Canada and Mexico over COOL. The panel issued its final report at the end of July and its decision has remained confidential. But a media story on August 21 quoted two unnamed sources saying the US lost, and that the panel’s decision will be in favour of Canada and Mexico.

The panel’s report is not expected to be made public until late September or early October. But a ruling against the US will give Canada and Mexico the right to impose retaliatory tariffs. Canada has already threatened more than $1 billion of tariffs on a wide range of goods, while Mexico has threatened more than $500M worth of tariff on an as-yet unpublished list.

Meat products are on the Canadian list and are bound to be on Mexico’s as well. Any tariffs will be a tragedy for all three countries and the concept of a North American market.

Tyson secures Hillshire

In other news, Tyson Foods August 28 completed its US$8.55 billion acquisition of Hillshire Brands, the largest such deal in US meat industry history.

Completion comes after Tyson agrees to divest a sow-buying business in a settlement with the US Justice Department’s anti-trust division.

Tyson thus becomes a US $40 billion company with some of the most iconic US brands in packaged meats.

 

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