September 8, 2014
Chasing greener pastures: Frustrating days for American beef cattle
Cattle markets, pastureland weather and industry restructuring trends are working at cross purposes to one other. This is undermining what should be a year of record profits and moving the industry northwards.
by Eric J. BROOKS
An eFeedLink Hot Topic
American beef cattle farmers are a frustrated lot these days. Cattle prices have repeatedly eclipsed their pre-2014 records, sometimes by as much 30%. Early this year saw live cattle prices set a rapid succession of new all-time price records in the US$135/head to US$140/head range, only to see them climb even higher to near an unheard of US$160/head in the late third quarter.
With feed costs falling 25% last year and nearly another 20% since the start of this year, cattle rearing margins are near their secular peaks. With costs crashing and prices going from one all-time high to another, market signals are screaming loudly, "Grow as many cattle as you can and you will be richly rewarded."
Drought, right where it hurts the most
Too bad then that a huge proportion of cattle farmers in America's prime beef production regions cannot take advantage of the situation. Drought has afflicted Texas, America's US southwest and southern plains since 2011. That is highly unfortunate, as this region is where the largest proportion of US beef cattle are raised. Coinciding with several other long-term trends, it is induced a restructuring driven inflection point in the industry's fortunes.
America's southwest, southeast and southern Great Plains always had scarcer feed resources than its Midwest. On the other hand, this region's longer grass growing season and milder winters more than compensated for its relatively scarce feed supplies. It meant that beef cattle's growth is not as badly disrupted by cold weather as it is in the Midwest.
From the 1950s to the 1990s, low transport costs and falling (in inflation adjusted terms) corn prices made it easy to take advantage of the southern plains' better cattle rearing weather. It made sense to grow beef cattle in a region where pastures grew late into the year, especially when inexpensive feed corn and soy could easily be shipped in at a low transport cost.
The past decade's coincidence of high corn costs and skyrocketing energy prices made it less economical to raise cattle in states like Texas, Oklahoma and California on feed. Just as the cost of feed and its transport peaked, 2011 saw the start of a multi-year drought, which is decimating a large portion of this area's pastureland resource. With feed and transport costs at historic highs, this drying up of pastureland accelerated a long running drop in US beef cattle inventories, especially in Texas, the southern plains and California, which constitute the industry's heartland.
Furthermore, the past decade's record high feed and transportation costs did more than restore the feed-rich Midwest's advantage. Countless Midwestern ethanol plants supplied landlocked central and northern plains cattle with nearby DDGS more quickly and cheaply than farmers in Texas, Oklahoma or California could ever obtain.
This combination of high feed costs, high transport costs and multi-year drought made the Southern plains and Southwest's cattle numbers drop off much more steeply than in the rest of the country.
Although, mostly on pure economics alone, 16 of the last 18 years have seen US cattle numbers fall, the 2011 drought was a proverbial straw that has broken the camel's back. Inventories have fallen a further 6% over the last three years, with losses ranging from 8% to 24% in Texas and the country's southern plains.
Good-bye Texas?
The accompanying graph shows how, through the last three years of steep inventory declines, some regions suffered far more than others. Texas once grew beef cattle than the next three beef cattle producing largest states combined.
The Lone Star state still leads America in beef production but saw its beef cattle herd fall a sharp 24% in four years, from 5.125 million head to just under 3.9 million today. In fact, while Texas accounts for 13% to 15% of America's beef cattle herd, from 2011 to 2013, this one state accounted for 65% of the multi-year fall in US beef cattle inventories.
Although Texas still accounts for far more cattle than other leading states put together, there are two other factors implying that its importance to America's beef sector will decline. First, Texas's was not only an ideal place for US cattle but also for the finishing of Mexican cattle exported to Texas and finished off in its feedlots.
Unfortunately, drought has afflicted northern Mexican regions that used to finish their own herds off in Texan feedlots. While that cuts the supply of finishing Mexican cattle, America's Country of Origin Labelling (COOL) legislation has made it much harder to sell the beef from Mexican cattle fed at Texan feedlots in America itself.
Second, if the weather and politics were not enough, Texas, a once mostly rural state, is now challenged by a population boom. Its state population has risen from under 10 million in 1970 to 24 million today and is expected to total 50 million within 30 years. The cattle industry has long relied on waters from the non-renewable Ogallala aquifer to meet its pastureland grazing needs.
Even long before the drought, the Ogallala aquifer's post 1950 water consumption far exceeded its replenishment. Some Texan cattle farmers had to bore wells deeper than 100 meters to access its falling water table. This declining water supply must now be shared with a fast rising urban population and a reborn energy sector, which heavily depends on water-injection driving fracking of oil-rich shale.
Although the recent drought brought such concerns to a head, rapid urbanization implies that the cost of pastureland irrigation water in Texas may rise to levels that will constrain how much cattle the state can raise in decades to come. The Texas Water Development Board is on record as stating, "In serious drought conditions, Texas does not and will not have enough water to meet the needs of its people, its businesses and agricultural enterprises."
Moreover, the drastic, post 2010 reductions seen in Texas cattle numbers also affected neighboring states. Formerly the second largest beef cattle grower, Oklahoma's steep 13%, 268,000 head drop in cattle numbers from 2010 to 2014 dropped its ranking from second to third place. Although Missouri leapfrogged Oklahoma to become the second largest US beef cattle growing state, it too did not fare well. Missouri lost 10% of its own cattle herd, with numbers falling 8%, from 1.85 million head in 2010 to 1.70 million this year.
From the south to the Midwest
On one hand, Texas's story was repeated across most southern US beef cattle producers. Kansas, Kentucky, Arkansas, Florida and Tennessee are southern plains states ranked the 7th, 8th, 10th, 11th and 13th largest US beef cattle producers. They saw their cattle inventories fall 1%, 5%, 8%, 11% and 13% respectively. To one extent or another, they were all afflicted by the same dry conditions that decimated Texan beef cattle.
On the other hand, greener, wetter Midwestern states such as Montana, Nebraska and South Dakota not only kept their 4th, 5th and 6th beef cattle inventory rankings but saw their respective inventories increase 1% over those same four years. Within the same region, ninth ranked North Dakota enjoyed plentiful precipitation from 2010 to 2014 –and saw its cattle inventory jump 9% over this time. Only a northern Midwestern state like Wisconsin, which is more dairy oriented and suffered a succession of harsh winters, saw cattle inventories fall sharply.
Hence, we find great variation in these last four years of declining overall US cattle numbers. Major producers lost anywhere from 8% to 24% of their herds while most Midwestern state inventories ranged from flat numbers to a 10% increase.
According to Glynn Tonsor, a livestock economist with Kansas State University, since 2005, the southern plains' share of cattle inventories has fallen by 4% while that of the Midwest increased 3% over this same time. In fact, since 1995, the southern plains and US Southeast's cattle inventories have fallen by a 2.2 million and 1.7 million head respectively. The Great Plains only lost 0.55 million beef cattle over this same time. As a result, the Midwest's share of US beef production to rise in approximately the same proportion that of the southern plains is falling.
Moreover, the Midwest's share of inventories is slated to rise even more quickly than before. USDA data indicates that over the past year, Texas's share of heifer inventories fell 5% while that of the Midwest increased 5% over the same time. Clearly, America's beef production is moving from its Texas and southern plains heartland into the wetter, more feed rich Midwest.
High feed costs and high transport prices kick-started this beef industry migration towards America's feed rich interior in the late 2000s. Nevertheless, last four years of arid weather has greatly accelerated the trend. Of course, it follows that with declining US beef cattle numbers strongly concentrated in Texas and nearby southern states, the region is now left with too many meat processing plants, and not enough cattle for them to run economically.
Moreover, with domestic consumption flat for forty years, a lot of American beef processing infrastructure was constructed at a time when per capita US consumption was 40kg. With per capita consumption having fallen to 24kg and the amount of beef produced per cattle more than doubling since the 1970s, the number of cattle necessary to satisfy flat demand has fallen. Hence, there simply isn't enough cattle left to justify the roughly 15,000 head/day of aggregate overcapacity which existed at the start of this year.
As a result, several large beef processing plants have closed in the past year and most of these were located in Texas, Oklahoma or California. In February, Cargill's Plainview, Texas plant was shut down and this was followed by mid-year's closure of its Milwaukee, Wisconsin beef processing plant. Although their infrastructures are being preserved in case US cattle numbers recover enough to make them economically viable, the closure of these two Cargill facilities eliminated approximately 5,800 head of cattle of daily slaughtering capacity, which eFeedLink estimates to be around 108,000 head/day at that time.
Similarly, April, saw National Beef Packing, America's fourth largest beef processor, shut down its Brawley, California facility that had capacity to slaughter 1,900 head of cattle daily.
With USDA statistics implying US beef slaughter overcapacity at nearly 15% at the start of 2014 and cattle inventories at least two years away from a significant, sustained recovery, industry observers speculate that additional cattle slaughtering capacity comparable to that of the above mentioned plants could shut down over the next year.
Of course, as cattle numbers fall off, feed costs become prohibitive and its transport from the Midwest uneconomical, the southern plains' feedlots became uneconomical even more rapidly than its meat processing plants: It just made more sense to raise beef cattle on feedlots close to corn and soy growing areas, thereby minimizing transport expenses.
This is threatening the existence of several dozen feedlots in Texas alone, where according to the latest reports, from January to September, 11 were closed permanently, 9 closed temporarily, while several others were being redesigned to house heifers –the one beef cattle line that is gaining in numbers and popularity nationwide.
Similar stories of feedlot closure throughout the southern plains are complimented by reports of feedlot expansions and filling to full capacity several hundred kilometers northwards in Midwestern states. According to a study jointly conducted by the USDA and the University of Oklahoma, the proportion of cattle on feed in Texas and Oklahoma fell from 31% in 2000 to 26% in 2014, while in Iowa and Nebraska, the proportion climbed from 21.6% in 2000 to 26.4% this year.
Moreover, even before drought had a chance to substantially impact beef returns, feed and transport costs were already shifting beef cattle rearing north. Released in March 2011 before the current drought impacted the economics of southern cattle producing states, a USDA report titled "The Diverse Structure and Organization of US Beef Cattle Farms", showed that beef cattle from the Midwest's central and northern plains had better genetics and a higher proportion did not change ownership after they passed weaning –a sign that northern plains farmers were more heavily invested in the outcome of their herds.
Midwesterner's willingness to invest more heavily came not just from better climate or lower feed costs but demographics: 18% of northern plains farmers worked at a another job to make ends meet, as opposed to 50% of southern plains farmers. With returns not even enough to sustain cattle farms on their own, farmers in Texas and the southern plains did not have much in the way of surplus funds to reinvest. Even before the ongoing four year drought hit, cattle farms in the US Midwest investing more heavily in their herd quality, primarily because of the higher returns they are enjoying compared to their southern counterparts.
While the current trend towards lower feed costs may restore some of the southern plains' lost advantages, it cannot stop a multi-decade trend: Higher returns favoured the northern plains even before the 2011 multi-year drought hit. All this implies that America's cattle industry, when it recovers, will be more solidly based in the country's central heartland.
Over the longer term, America's rising population and a flattening out of along-run fall in per capita beef consumption means that barring a nasty recession, beef demand should begin an era of nominal, long-term annual increases. With demand for beef outside of America, particularly in Asia, booming, the country's beef producers can see beyond their present troubles a new era of export-driven growth.
Towards this end, the USDA reports that heifers as a proportion of America's beef cattle inventory entered 2014 at 18.8%. This ratio exceeds that which preceded previous expansions of the country's beef cattle numbers. The farmers know that demand for beef is there –even if drought persists in the southern plains, the region's cattle producers expect to fetch a good price selling their heifers to fellow farmers in states with greener pastureland.
When market sentiment is dominant by such bullish sentiment and high prices, anything but a catastrophic weather disruption implies a turnaround in cattle numbers will occur. Caught between arid southern plains, an expansion of more profitable Midwesern herds, and cattle's long growing cycle, a substantial upturn in American beef production and exports could still be two years away. This assumes that market conditions will remain mostly positive throughout this time.
All that is known for sure is that with 80% of beef slaughtering handled by four integrators, the industry is quietly relocating a lot of cattle production and beef slaughtering to states where the grass is literally greener.
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