The price of corn. The cost of calves. The near record amount of cattle in feedlots. That is a deadly combination for cowboys out to make a profit. However that is reality. But like all reality TV shows, scenarios change, and will there be a change in store for the beef industry?

Whether it is writing on the wall or the picture in the crystal ball, it is clear that future beef profits will be dependent upon a production cutback. The April 1 feedlot numbers were the second highest ever for April at 11.6 million head, and trucks were unloading calves into feedlots during March at a 7% rate over 2006 volume. But the unusual element is the fact the beef economy is currently marching to two different drummers, says Iowa State livestock economist Shane Ellis, “Historic trends usually suggest that high feed costs lead to lower feeder cattle prices. However, even though the price of corn is over 60 percent above a year ago feeder cattle prices are at and above prices of a year ago. There appear to be two forces supporting the feeder cattle market. First is the cash price of fed cattle prices which have been around a $100/cwt in the resent weeks. Second is the availability of feeder cattle. The January Cattle report suggests that in the next year there may be a tighter supply of domestically raised beef calves.”

The increased number of placements during March may be a phenomenon attributable to corn prices, suggests Purdue’s Chris Hurt, “The data for March show that placements of calves weighing over 700 pounds were up 11 percent. In addition, lower corn prices may have helped stimulate March placements. May corn futures, for example, dropped $.61 per bushel in March, although $.20 came on the last day of the month. Of equal importance was the strength of live cattle futures. August futures were as low as $88 in early February, but rallied to highs above $95 in March.”

That helps make ends meet for the livestock producer, but in the long term, the current environment has to change says Hurt, and he believes that it is. The high number of cows headed to slaughter and the high number of heifers in feedlots both indicate the size of the breeding herd is being reduced. And he says a reduction in the breeding herd will be necessary if the industry is to be profitable. “Maybe more importantly for the cattle industry is the prospect for a smaller cow herd being reported in the July 20 Cattle inventory update. The way for the brood cow sector to recover from high feed prices is to reduce the size of the cow herd thereby reducing the level of beef production by 2009. In this manner, higher feed costs will eventually be passed to beef consumers.”

Another element helping profitability is the balance of trade in beef. Glenn Grimes and Ron Plain, livestock economists at the University of Missouri say beef imports are down while exports are up, “Beef exports in January and February of 2007 were up 23.8% from a year earlier. Exports of beef during these two months were up sharply in percent to Japan and Taiwan because their borders were still closed to beef last year because of BSE. Our exports for these two months were up to Canada by 21%, down to Mexico by 5.3%, up in the Caribbean by 22.8% and other up 138.7%. Beef imports for January and February were down by 7.8% from 12 months earlier. Net beef imports as a percent of production was down from 10.1 in 2006, to 7.7% in 2007. In other words, beef supplies domestically were reduced by about 2.4% in January and February of this year compared to last year.”

Another dynamic in the beef industry is the transition of the market from the southwest to the North Central states. Dillon Feuz at Utah State University compared state production numbers with years past and found, “Feedlots in the north appear to be feeding more cattle relative to last year and relative to the south. South Dakota, Iowa, and Nebraska on feed totals were up 10%, 6%, and 3% respectively. Conversely, Texas, Kansas and Oklahoma on feed totals were down 5%, 4% and 3% respectively. This lends some credence to the “window” surveys that are reporting more cattle being fed where more ethanol plants are being built.”

Hurt at Purdue says beef prices should keep many producers in the black on the coming months, “For the first quarter of 2007, Nebraska finished steers averaged $90.70 per hundred, which was $1.50 higher than the price in the same quarter in 2006. This was an impressive showing given that beef production was up over two percent for the quarter. The number of head coming to market was up four percent, but average weights were nearly two percent lower because of high feed prices.” And Shane Ellis at Iowa State says there is only one factor that is responsible for underpinning the calf market, “It would appear that those holding feeding feeder cattle are not saturating the market which has helped support the feeder cattle market. It would also appear that in the coming year domestic beef feeder cattle supplies will be in slightly lower, adding additional support to the feeder cattle market. This is good news to cow-calf producers. Many would have never expected to have such a long run of high calf prices. They can thank the influence of a strong fed cattle market.”

Summary:
Despite high corn prices, the strong cattle market is helping keep the feeder calf market in a demand mode. While feedlot placements are at near record levels that will have to change if profitability is going to exist. The latest USDA estimates indicate the breeding herd is being trimmed, and that will be necessary for the consumer to keep the industry in the black in the future.