Record-high fed cattle prices seem likely to persist for awhile. And high fed cattle prices buoy feeder cattle prices, despite high feed costs. Prospects of solid profits are tempting some cow-calf producers to expand their herds. However, several monkey wrenches are lurking that could fall in the works.
One possible roadblock is a consumer "push-back" against rising retail beef prices—a softening of demand that may occur. Another is a potential stall in the U.S. economic recovery. Economic growth could succumb to rising oil prices. Or suppose the Federal Reserve starts to worry about inflation. If the Fed begins unwinding its low-interest, easy-money policy, that would slow economic gains.
However, competition for grass, the availability of acres for grazing and the prices of hay and forages may be most critical, at least at the ranch and farm level. "Cow-calf producers will not expand their herds unless they have enough grass on their pastures to feed a larger herd and unless enough hay is available to cover their needs over the winter," says Altin Kalo, a livestock market analyst with Steiner Consulting Group, Manchester, N.H.
U.S. hay acreage down 1.5%, fourth lowest acreage on record
USDA surveys in March indicate U.S. farmers plan to harvest 58.973 million acres of hay in 2011, down 900,000 acres or 1.5% from 2010. This is the smallest number of harvested hay acres since 1994 and, according to USDA, the fourth lowest ever on record. Hay acres peaked in 2002 and since then have contracted by about 5%.
Some of the reduction in hay acres is due to fewer cows. The 30.865 million head on hand as of Jan. 1, 2011—which is the latest survey of the U.S. beef cow inventory--was 2.3 million head lower or 6.8% lower than in January 2002.
Rising competition from other crops for acreage is another reason for declining hay acres. Demand for grains and oilseeds has shifted some marginal land into row crop production.
Expansion watch: cattle producers have not held back heifers
"The thinking is that if deferred feeder and live cattle prices rise, producers will respond by holding back heifers and the extra demand for feed will cause hay acres to rise again," says Kalo. "So far, that has not taken place. Plus cow-calf operators will likely find feed availability more challenging even if they decide to expand. Drought in the Southern Plains is a significant concern."
The reduction in hay production will delay any plans to rebuild herds. "Some reports indicate producers continue to operate in survival mode, trying to maintain as much of the core herd as they can," says Kalo. "Sharply higher corn prices will intensify competition for feed."
He adds, "This gives beef producers an incentive to put on as much gain outside of feedlots as much as possible. So far that has not happened because live cattle prices have risen at such a brisk pace. Feedlots show strong demand for feeders, placing lighter weight calves on feed. Pulling lightweight cattle into feedlots has kept dry hay prices in check."
But suppose cattle prices stall. "Then the situation could reverse," says Kalo. "Delaying placements could boost hay needs and spike hay values, thus further complicating herd rebuilding plans."
Summing up: key points to consider about cattle herd expansion
* Stratospheric feeder cattle prices lure cow-calf producers to expand.
* But producers will not expand unless they have enough grazing available and enough hay for the winter.
* Any slowdown in feedlot placements could intensify the need for forage outside of feedlots.