February 22, 2008

Kentucky’s beef industry has enjoyed nine profitable years, but 2008 could be a challenge. Higher feed costs are pushing cattle prices down while inputs costs are rising, putting the squeeze on profits, says an agricultural economist with the University of Kentucky College of Agriculture.

Economist Kenny Burdine said he expects fed cattle will average near 2007 levels which were very strong. But feeder cattle prices will be strongest in the spring and production costs are going to be a challenge.

“I think it’s going to be the good producers making money in 2008,” he said.

Traditionally, cattle prices are impacted by cattle numbers. Pricing generally is cyclical with several years of high prices encouraging farmers to add to their herds, which leads to larger cattle numbers and lower prices. The cycle switches as lower prices cause farmers to stop expanding and tighten their herds. But other factors have stepped in to affect profitability and slow the expansion process.

Drought impacted 40 to 45 percent of beef cattle herds in 2006 and set the stage for short hay supplies this year. A lot of hay was shipped to the West leaving relatively low supplies in this state going into 2007. Then the drought hit here and several other southeastern states, affecting 20 to 25 percent of beef numbers.

“Over half of the beef herd was impacted by drought in the past 18 months, and that had a real impact on numbers,” Burdine said. “In addition, because of (the lack of) forage production, we had the lowest hay stocks in more than a decade. As a result, the cost of maintaining cows went up about 50 percent this winter, even with alternative feeds.”

With high feed costs and short feed supplies, producers sent more cows and lighter weight calves to market this fall and winter. As a result, Kentucky’s beef cow numbers are down about 4 percent from a year ago.

“In what traditionally should have been our third year of expansion, we’ve seen some contraction, and we’ve actually stalled this cattle cycle,” Burdine said. “A lot of the old cattle cycles don’t apply in today’s market. We’re not following typical cycles. Normally we’d have 1-3 percent increases per year.”

Small increases in cattle numbers are going to be overshadowed by international trade, grain prices and input costs to the point that there’s going to a lot less cyclical price changes in the market over the next few years. Prices are going to be more volatile from one year to the next.

“Until things settle out, I think you’re going to see less certainty in prices year to year,” he said. “So far retail demand has remained strong, but that may change with fuel and heating costs squeezing consumers.”

The high cost of feed doesn’t look to change in the next couple years, with the only real wildcard being ethanol profitability, Burdine said. If ethanol profitability declines, corn demand will as well.

With all the other factors affecting cattle producers today, cattle numbers aren’t likely to impact pricing much for the next couple of years, Burdine said.

“If we start expanding the herd again, and I’m not sure we will, it will be two to three years before we see a lot of additional feeder cattle in the pipeline,” he said. “The challenge the next 12-18 months will be from rising grain and input prices and lingering hay shortages.”

Rather than expand their cattle numbers, now may be the time for farmers to reassess some of their management practices, Burdine said. They may want to look for ways to become more efficient operators through such things as extended grazing and backgrounding systems to potentially improve their profitability.