December 21, 2009

US cattle market has to wait for upswing

Livestock producers will not feel financial relief in 2010 until consumer demand improves.

John Lawrence, director of the Iowa Beef Center, spoke to cattlemen and women at the 2009 South Dakota Cattlemen's Convention Dec. 3 in Sioux Falls, S.D.

Lawrence said the economics have changed in the cattle industry, in part because of higher grain prices that put upward pressure on land costs and downward pressure on calf prices and pressure on cow herds. He said that while liquidation will continue into 2010, which will tighten supplies, now is a good time for producers to invest in the cow herd.

One example of a smart way to invest in the cow herd is to keep back heifers. Lawrence said producers should keep the same dollar amount of heifers each fall instead of the same number of heifers, meaning producers should keep a large number of them when they are cheap and fewer when they are expensive.

"Those cheaper heifers produce calves that are more valuable than she was throughout her lifetime," Lawrence added. "So you have a low-cost investment producing a high-priced output. You put the high-priced heifers in, and everything she produces sells for a lower price than her."

Lawrence also addressed the prospect of inflation caused by the federal money being pumped into the now deflated economy. He said the United States will likely experience inflation eventually, which would be combated by high interest rates. Producers who have accumulated debt from losses over the last two years might want to secure a fixed interest rate, he said.

"While those variable rate lines of credit are nice now because interest rates are low, I think at any sign of inflation I would be trying to switch those into a term debt, spread them out over three to five years, lock in the interest rates at the low levels before they rise," Lawrence said.
 

With energy cost increases likely in 2010, Lawrence said producers should look to break the current operating model, which is buying corn and using cheap oil. One way to do that is to raise corn along with recycling manure from the livestock operation.