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Bullish on Beef, Part Two

Bullish on Beef, Part Two
Perfect economic storm causing downward slide in nation's cattle herd

Click here to read Bullish on Beef, Part One

Veteran cattleman Mike John says there's a 'perfect storm' of economic factors causing a dangerous downward slide in the nation's cow herd, now down to its lowest numbers since the 1950s.

"First you have this major time lag in producing beef, compared to pork and poultry," says John, who is director of MFA Health Track and former president of the National Cattleman's Beef Association. "Secondly, this shortage of cattle and cows combined with a huge demand for hamburger (because it's the least expensive beef product) has caused us to kill a lot of cows. They're bringing over $1 a pound, which is unheard of for lean trim.

"We've been killing cows at a historically high rate, simply because the demand and price has been so high," says MFA's Mike John.

"We've been killing cows at a historically high rate, simply because the demand and price has been so high," he adds.

And there's the rub. These cows are how we create the next generation of calves, John says.

RELATED: Bullish on Beef, Part One

A drought forced cattlemen to sell or move cattle and cows, which accelerated the speed calves were placed in feedlots. The drought was even worse in northern Mexico than in the U.S.

"They had a drastic reduction in their cow herd and that is a source of feeder cattle into this country," says John. "Canada's herd has had a similar decrease in size, mostly due to feed costs."

Now add in the exchange rate. That's important, because the value of the dollar has been low enough that the U.S. hasn't been the most economical market for lean trim in places like Australia and Uruguay, places where we usually import lean trim; lately it's been cheaper for retailers to buy U.S. cull cows than to buy imported lean trim.

John believes the best strategy is to retain more heifers and put weight on cattle. However, if we have significant reduction in placement of feeder cattle in feedlots; if we retain heifers back for breeding purposes, then we exacerbate the growth problem even more.

Expansion tipping point

Are cow calf guys expanding by keeping more calves, more aging cows, or both?

"Some cull cows are bringing $1.15 a pound," John says. "What is that price level where people stop keeping cows? The same will be true with heifers - at what price do you decide to sell her? Cow slaughter has tapered off a bit from previous years, but I contend that's because we've already killed off most of the aged cows. You can't keep that pace forever.

"I can find economists who will tell you the price of lean trim is reducing the herd and you've got to overcome that downward slide, but that's going to take some doing," he concludes. "We're going to have to have rain in Texas, Oklahoma, Wyoming and Montana in order to have a place to put those cows."

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

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