In the second quarter cattle update, we examined the beef sector’s search for stability amid tight profit margins. Unfortunately, the industry has yet to find stable footing, and in some respects the industry’s footing has become shakier. The temporary, partial loss of the Tyson packing facility in Holcomb, Kansas acted as a black swan event and compounded issues in an already somewhat subdued market.

  • Beef supply has grown at a more rapid pace than demand
  • The Tyson fire acted as a black swan event to the industry
  • Profit margins remain very tight for 2019
  • How can producers work with their lender during this period?

The Big Picture

Much of the shaky footing in the industry can be traced to the underlying supply and demand story. Beef inventory levels have continued to increase from recent lows set in 2014. In July 2019, the beef cow herd had increased 9 percent from 2014 to slightly under 32.5 million head. The current herd size is the largest since July 2008. Cattle on feed have increased steadily from 2014 lows as well. The total cattle on feed in July 2019 was 14 percent higher than in 2014. Additionally, cattle on feed at feedlots with more than 1,000 head capacity also set record highs in July and August with 11.5 and 11.1 million head, respectively.

As inventory levels have increased, the total ending stocks of beef have also increased, a sign of supply outpacing demand. Both the USDA’s World Agricultural Supply and Demand Estimates (WASDE) and the USDA’s Economic Research Service (ERS) report that beef stocks are near record levels. At the same time, beef disappearance per capita remains historically low, though slightly higher than in previous years.Line graphs of Beef Herd & Inventory Levels and Beef Stocks

In addition to rising domestic stocks, the export market has also tapered off compared to a year ago. A strong U.S. dollar, slowing global growth and trade tensions have also presented challenges for the export market. Year-to-date 2019 exports of beef remain strong compared to other years, but they have lagged behind export levels in 2018. Additionally, the recent exports of hides and variety meats also remain well below historical averages.

When taken together, this year’s exports of all beef products through July 2019 are 5 percent below 2018 levels and only slightly higher than the 2013-2017 inflation-adjusted average.Line graphs of Beef Exports and Hides & Variety Meats in millions

Slower overall demand and widening supply have created a landscape of mostly declining prices. The general decline in prices can be clearly observed in Kansas live cattle bids. As the supply of cattle outpaced demand, the price of fat cattle in Kansas has generally trended downward since early 2015.Kansas Live Cattle Cash Bids, range and average in dollars

The Black Swan

By now, most are familiar with the fire at the Tyson Foods facility in Holcomb, KS (see official release here). The partial loss of this facility punched a hole in both national and local slaughter capacity. Fed cattle slaughter actually increased in the two weeks following the fire, then declined 5 percent relative to the weeks prior to the fire and relative to year ago levels. This trend likely suggests issues in re-ordering of logistical supply chains that may persist.

Tyson has recently communicated that the rebuilding process is underway, and the facility will be back online by January.

Although the drop in slaughter proved less serious than some had feared, this unexpected loss of capacity has dampened the cattle markets. Unfortunately for cattle prices, the partial loss of the facility coincided with a trend toward poor demand, large inventory reports and the seasonal flush of cattle coming off of grass. As such, the local cash markets and futures markets have recently turned downward.Kansas 700lb Steers and Kansas Live Cattle Cash Bids and Nearby Futures in dollars

Back to the Big Picture

There are no two ways about it: Profit margins for 2019 have been very tight. From May to September, our outlook has remained unchanged to slightly more bearish on profit margins. As an example, in April the Food and Agricultural Policy Research Institute estimated cow-calf returns for 2019 to be below $50 per head, their third lowest estimate in the last decade. Since that point, the calf market has significantly softened, likely resulting in very thin to potentially negative margins.

In late August, the USDA announced their expectation that total beef cash receipts will decline 1.5 percent from 2018. Though some input prices are likely to be cheaper this year and offset the loss in receipts, it is likely that the decline in cash receipts also means much tighter profit margins throughout the beef sector. Kansas State University has also projected the losses in the fed cattle industry to escalate in the second half of 2019 and into early 2020.Beef Cash Receipts & Cost per Cow and Kansas Feedlot Net Returns graphs

Ranchers with favorable grass conditions and well-hedged feed costs will fare better, and some will likely have strong financial performance into early next year. However, taken as a whole the beef cattle industry is still searching for stable footing and expanded margins.

How Can Producers Best Work with Lenders During This Period?

As a farmer- and rancher-owned cooperative, American AgCredit’s mission is to be the best lender to agriculture by partnering with your operation. As the beef industry continues to search for better footing, here are three tips for working with your lender during times of tighter profit margins.

  1. Be proactive in your communication with your lender. Our ability to work with our customers through good and bad times is helped enormously by proactive and early communication. Proactive communication may allow us to help you get in front of challenges. Important points to communicate with your lender include your current positions, marketing plans, stress points and other relevant data related to your operation.
  2. Keep updated projections and financial scenarios. It’s always best to have a sharp pencil on your financials, but when the headwinds are stiff it is even more important. As you work through your projections, make sure to communicate with your lender to help create the best possible solutions.
  3. Try to build flexibility into your marketing plan. In challenging times, it is even more important to execute a thoughtful marketing strategy. A well-organized and flexible marketing plan can help you take advantage of opportunities – or minimize risks. If you are actively keeping your lender informed of plans, we have a better chance of offering flexibility to execute those plans.

LEARN MORE

To learn more about financial services tailored for your cattle ranching operation, visit our contact page or call us today at 1-800-800-4865.

Disclaimer: This material is for informational purposes only and cannot be relied on to replace your own judgment or that of the professionals you work with in assessing the accuracy or relevance of the information to your own operations. Nothing in this material shall constitute a commitment by American AgCredit to lend money or extend credit. This information is provided independent of any lending, other financing or insurance transaction. This material is a compilation of outside sources and the various authors’ opinions. Assumptions have been made for modeling purposes. American AgCredit does not represent that any such assumptions will reflect future events.