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Bullish on Beef, Part One

Bullish on Beef, Part One
A perfect economic storm is making it difficult to rebuild the nation's cattle herd

Veteran cattleman Mike John can't see any reason why record high cattle prices should sag. In fact, he thinks that trend will continue for several years.

"It's going to take a long time to build up any supply to the point where it has an effect on price," says John, who is director of MFA Health Track, a quality assurance feeder calf verification program serving  Midwest cow-calf customers. John is also past president of the National Cattlemen's Beef Association, so he's seen the livestock industry from every angle. I caught up with him at his Missouri farm to talk about those record cattle prices and the future of the industry.

"There's never been as much profit potential for adding weight to cattle as there is right now," says Missouri cattleman Mike John.

"There's never been as much profit potential for adding weight to cattle as there is right now," says John. Of course, any kind of global disruption or disease can disrupt markets, he adds. "It's never risk free, but we're not going to change the supply issue for several years. We're still going to see volatility, so I try to encourage people to manage risk the best you can."

Because there's so much value at stake now, protect it with some kind of risk management tool, he urges. You can hedge, forward contract, or sell livetsock on video for future delivery, for example. There are livestock insurance programs you can invest in.

"What you don't want to do is take a 400-pound calf and sell them right off the cow," he stresses. "Those guys aren't looking at their business like a business.

"There are two things wrong there: one, they will shrink more if you wean them and sell them the same day because it's the most stressful day of their life; and two, the incremental value of gain is huge right now," he says. "So by weaning them at home and putting weight on them you can drastically increase net revenue without investing in any more overhead."

There are proven weaning protocols that can control health risk and provide added value that feeder buyers are willing to pay for. That's true everywhere.

"Some farmers might say they don't have the facilities, but I've seen calves weaned using a single strand of poly wire," he says. "I've seen tools used where the calf has a product that prevents nursing.  So, it can be done."

The cattle market is in rare form right now, John says.

"There's nothing I can see that will cause this market to crash for several years, and I don't think we're ever going to get back to where we were before this drought cycle started," he explains. "Obviously some demand issues can happen, not just domestic but also with exports and exchange rates. Even so, the exchange rate and worldwide demand for beef has added a demand factor we've probably never seen before. The growth in demand for U.S. beef with foreign customers is incredible."

All this is lending itself to a shorter U.S. supply. At 29 million beef cows, it would be the lowest number since the 1950s.

"Having said that, we're still producing the same amount of beef as we did in the '50s, through better efficiency," he notes.

Short supply
John says several years of drought in the wrong regions created this shortage.

"Texas is the largest cattle state in the nation, from both a land mass and cattle inventory standpoint, but several years of drought caused a mass exodus," he says. "Two years ago many cattlemen sent their cows to places where there was grass, like Nebraska. Those cows got processed into hamburger and the calves went to feedlots – so we moved a lot of production forward.

"The problem with beef compared to hog and poultry is the lifecycle. It takes about three years to really have any effect on the meat supply compared to hogs and chickens. A heifer would be a year old before she would be bred the first time; she will calve when she's two years old; then it takes 17 months for that calf to go to processing."

And that leaves Americans waiting - perhaps for a long time – for the herd to grow and beef prices to come back to earth.

In future blogs I'll share John's thoughts on Brazil, biofuels, beef prices and packer consolidation. Check back here for more.

Continue reading: Bullish on Beef, Part Two

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