Cattle ranchers who quickly expanded their herds after a prolonged Texas drought now have become their own worst enemies.
The industry-wide buildup was the fastest Shelby Horn, a fourth-generation cattleman with a family ranch in Nebraska, had seen in at least 30 years. The result: An explosion of beef on the market and a 30 percent drop in wholesale prices from a record set in May 2015, when supplies were tight after the drought. And with many of the calves still a year or two from slaughter, the industry finds itself with no easy way to adjust.
This could mean beef prices will keep falling through 2019, according to John Nalivka, the president of Sterling Marketing Inc., an industry consulting firm.
"Most cow-calf guys, they'll be in shock by the time they get their fall calves sold" because of the steep plunge in prices, said Shawn Walter, owner of Professional Cattle Consultants in Weatherford, Oklahoma, in a telephone interview. "That's going to chill most people's expansion plans."
Beef production will rise 5.2 percent this year and climb a further 3.4 percent in 2017 to a five-year high, the U.S. Department of Agriculture projects. Output is increasing as the cattle, hog and chicken industries expand simultaneously, leaving the nation set for a year of record meat production and declining prices. Consecutive years of bumper grain harvests have also sparked expansion as feed costs fell.
"The cattle business is a years-long cycle," said Jeff George, manager and owner at Finney County Feedyard near Garden City, Kansas. The impact of the latest expansion, though, "snuck up on a lot of us," he said.
Beef supplies could keep climbing even as ranchers start to pull back their herds, cattlemen say. That's because farmers will sell some of their heifers, young females who have not birthed a calf, to slaughterhouses. While that eventually means fewer calves and a smaller herd, it just creates more meat in the meantime.
Rancher Horn, who is 51, offers a case in point. As pasture conditions improved in 2014, the number of animals on his family-run Nebraska ranch increased to 700 from as lows as 550 in 2009. When the drought ended, calves were still selling for as much as $1,600 a head, according to Horn. Now, they go for as low as $600, he said, adding that his family is considering lowering their cattle numbers to 600.
Bigger animal supplies are a boon to companies including Tyson Foods Inc., the largest U.S. meat processor, which can pay less for its livestock supplies and spread the high cost of running their plants across more animals. Cargill, the U.S. agricultural commodities giant, said Tuesday it posted a 66 percent jump in fiscal first-quarter profit as it benefited from higher cattle volumes at its slaughterhouses.
More beef production is also a reprieve for restaurants and fast-food chains including burger seller Shake Shack Inc., which said in August it expected prices for the meat to stay low for the rest of the year. Consumers' grocery store costs are starting to come down. Retail ground-beef has dropped in eight of the past nine months and is down 14 percent from a record reached in February 2015.
Herd expansion or contraction takes time because cattle can be almost two years old when they are slaughtered. Ranchers and farmers who breed cows and produce calves usually sell weaned calves weighing as much as 600 pounds (272 kilograms) to stocker operators, who then add a couple hundred more pounds, or to feedlots that bulk them up to 1,400 pounds for slaughter.
Still, the steps being taken now to cut back herds will slowly work their way through the system and the flood of supplies will start to ebb. The U.S. herd is expected to expand by only about 0.5 percent in 2017, said Derrell Peel, a professor of agribusiness at Oklahoma State University in Stillwater. That's down from his previous forecast for a 1.5 percent increase.
Nalivka of Sterling Marketing expects a gain of just 0.1 percent next year.
Increased volatility in the cattle-futures market has made producers wary of keeping their herds as large as they are, said Horn, the cattleman. "That expansion has been killed," he said. "The volatility and lower prices were a nail in the coffin."
(c) 2016, Bloomberg · Shruti Date Singh, Lydia Mulvany