Cow-Calf Producers Should Be Profitable in 2022
Published: Friday, January 7, 2022
The following from Melissa McKendree, assistant professor, Michigan State University, and Matt Herrington, director of commodity analysis, World Perspectives Inc.
It has been a crazy past year and a half! Fortunately, the beef industry outlook is strong heading into 2022, despite rising input costs and labor concerns. However, the looming question is if recently strong domestic and export beef demand will hold.
Supply Outlook
Cow-calf producers, the foundation of the U.S. beef industry, faced unique and challenging circumstances this year. Severe drought covered most of the western U.S. This reduced forage availability, forced producers in these areas to liquidate beef cows and pushed stocker cattle and calves off pastures early. Beef cow slaughter is up 5.5 percent YTD—and over 23 percent compared to the five-year average to date.
The effects of drought and high cull cow prices, supported by rising hamburger prices, led to cow herd liquidation. Producers' liquidation mindset is further illustrated by the increases in heifers placed into feedlots and heifers' share of fed cattle slaughter. The October USDA Cattle on Feed report estimated heifer on-feed inventories were up 2 percent from 2020.
According to the Livestock Marketing Information Center (LMIC), YTD heifer slaughter is up 10 percent. Michigan producers were fortunate to avoid this year's drought and, as such, actually expanded the Michigan beef herd from 93,000 to 100,000 cows in 2021.
Cow-calf producers should see positive profits in 2021 due to stronger feeder cattle prices and the fact that winter feed supplies were purchased before most of the 2020-21 grain price rally. Profitability, however, remains below levels needed to encourage producers to retain breeding heifers and expand the cow herd. Currently, World Perspectives Inc. (WPI) forecasts the U.S. beef cow herd will contract another 2 percent in the January USDA Cattle on Inventory report.
We look for the Michigan beef herd to remain steady in 2022 with possible upside potential. For 2022, the LMIC projects cow-calf profits to average $88 per head, up from 2021, due to sustained high calf and cull cow prices. The LMIC projects southern plains feeder cattle prices to be $156-160 per hundredweight for 700-800 pound steers, on average for 2022, and $175-178 per hundredweight for 500-600 pound steers. However, keep in mind the local Michigan basis (difference between cash and futures prices that represents local economic factors) in your area and seasonality when using these price projections.
With cow-calf producers seeing few market signals to expand production, feeder cattle supplies will remain tight into 2022 and force feedlots to compete to secure cattle. Placements in 2021 have returned to normal after 2020's COVID-19 disruptions, though rising feed costs threaten to reduce feedlot margins and feeder cattle procurement.
The spring 2020 COVID-19 reduction of fed cattle packing capacity and slaughter rates meant that cattle feeders quickly became "backlogged" on fed cattle marketing. That backlog finally cleared in late summer 2021, as fed cattle weights neared their five-year average. Fed cattle slaughter weights have increased recently, however, and early-November weights were 6 pounds shy of their 2020 record, which suggests cattle feeders may be running behind on sales.
Other factors that explain heavier weights are favorable weather in the cattle-feeding region and large premiums packers are paying for Choice cattle. Normally, heavier carcass weights would mean bearish near-term prices, but packers have little reason to push prices lower amid record-large margins.
WPI estimates the number of cattle on feed more than 150 days at the beginning of October was up 15 percent from 2020, which means November through January fed cattle slaughter should remain above year-ago levels. From there, the smaller September placement rate means fed cattle supplies will remain moderately tight into summer 2022. The LMIC forecasts the 2022 five-market live steer price at $128-130 per hundredweight. However, again consider your local basis and seasonality when using these price projections.
LMIC is projecting positive feedlot profitability for 2022, but factor such as marketing, price risk management and efficiency will dictate returns for individual operations.
Demand Outlook
One of the biggest surprises of 2021 was the strength of U.S. beef (and other meat) demand and prices. The boxed beef cutout (a measure that estimates the beef carcass' gross value based on prices for individual items such as the rib, chuck, brisket, etc.) traded above its five-year average for most of 2021. The high cutout value helped push packer margins to record highs in 2020 and 2021, with many stakeholders questioning why this has not translated to equally high cattle prices.
While many factors determine fed cattle prices, slaughter capacity is currently a "choke point" in the supply chain, and there is insufficient hook space for current cattle supplies. Consequently, there may be excess fed cattle supplies compared to packer demand, which is limiting fed cattle price rallies.
Additionally, the packing and processing sector is experiencing continued labor shortage, and thus increased costs. We suspect packer margins are not as high as are often estimated using publicly available data. Looking into 2022, many project the choice cut out value will drift lower, likely from $255-280 per hundredweight.
Beef exports volume set records in 2021, with strong demand from China, South Korea and Japan. According to the Daily Livestock Report, nearly 80 percent of the increase in U.S. beef exports can be attributed to China. This export demand increase bolstered byproduct values as the U.S. exports beef products that we do not frequently consume domestically. We look for 2022 exports to remain near 2021 levels, with possible additional benefit from Brazil's two recent BSE cases that may change that country's export opportunities.
During the early days of COVID-19, domestic beef demand dramatically shifted from away-from-home to at-home-consumption. This caused a sudden shift in demand for specific beef cuts that was coupled with increased demand for high quality (e.g., Choice) beef. Increased consumer disposable income, driven in part by unemployment payments and child tax credits, further supported the surge in beef demand. By mid-2021, however, consumers began returning to restaurants, but faced limited menus and service.
It is unclear, however, how consumers will react as some government payment programs end and retail meat prices remain high. As such, many question if this food inflation will shift meat purchase trends.
Beef has an advantage at the retail shelf, however, as it is generally preferred over pork or chicken. Moreover, recent increases in SNAP (i.e., food stamp) benefits may lead to higher purchases of lower end beef cuts and hamburger as food prices rise.
Overall, the 2022 beef and cattle market outlook is positive. However, there is still much uncertainty given transportation issues, rising input prices, labor shortages, as well as demand.
Thus, we encourage beef producers to use tools to help understand cost of production and breakeven prices, such as enterprise budgets, available through MSU Extension. Furthermore, explore forward pricing options, either through hedging or forward contracting, to help lock in profit margins instead of waiting to price on the case market.
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