Not So Fast: The Next Herd Expansion Will Take Time

Lance Zimmerman, SVP – Senior Animal Protein Analyst

RaboResearch

Food &

Agribusiness

It is expected that beef production will be in a relatively predictable decline for the next several years due to more than four years of U.S. cow herd liquidation and a cowcalf segment that will eventually look to rebuild, but the beef supply chain should also see the cattle producing and processing segments proceed with more caution over the next 10 years.

This is the topic of the latest RaboResearch Food & Agribusiness report that is available to Rabobank clients online and will be shared with attendees of the 2023 Cattle Industry Convention during a Learning Lounge presentation at 10:30 a.m., Thursday, February 2, in the NCBA Trade Show.

The report and discussion in New Orleans will allow industry participants to better understand some of the market forces that are likely to shape the next cattle cycle and help them navigate what looks to be a slower, more calculated transition into the next cow herd rebuild.

The price volatility and boom-and-bust nature of the recent cattle cycle’s (2014-present) cow herd expansion and processing capacity exhaustion continue to be echoed by participants, even as the next cow herd rebuild remains years away.

Yet, the supply chain is already building out additional infrastructure with three new regional processing plants in some phase of fundraising or construction, and the reality is the payoff for that investment is still years away.

Cow herd liquidation and rebuilding phases generally take years to develop within each cattle cycle — well beyond the initial onset of environmental and/or economic conditions that spur those transitions. The 2022 annual culling rate will reach a record high near 13.4%. Expect the 2023 culling rate to be closer to 12%.

Data suggests a culling rate near 10% is needed to simply stabilize the U.S. beef cow herd. That means the best-case scenario is some level of stabilization arriving in 2024, and the timeline from previous cow herd expansions suggests it will take until 2025 or later to see meaningful herd rebuilding.

Another consideration for the cow herd rebuild is the state of the beef heifer population. Potential herd replacement numbers are near two-decade lows. USDAreported feeder cattle and calf sales show the percentage of heifers selling in auctions, online sales and direct sales peaked in the past year and are moving back to historical norms. From January to June 2022, heifer feeder cattle and calves made up 40.7% of all sales. That was an all-time high for that period in the 18-year dataset. The third quarter heifer mix declined to 38.3%, the fourth-highest value during that time. While fourth-quarter values increased seasonally to 39.7%, moving to within a percentage point of the long-run average.

While the heifer sales trend appears to be turning, the cow-calf segment is not prepared to add breeding inventory yet. The level of retention by U.S. farms and ranches remains considerably smaller than the start of the previous rebuild and reinforces that the supply chain is two or three years away from any meaningful increase in bred heifer and cow numbers and likely two or three more years away from additional cattle slaughter. Patience is necessary.

U.S. cattle producers and processors will likely also face more competition for protein consumers and feed resources over the next several years. This could flatten the curve on any upward moves in beef and cattle prices — stifling industry optimism and slowing the start of the next herd rebuild.

All else equal, tighter beef supplies lead to higher consumer prices, but that market fundamental will most likely be challenged by a larger available pork and broiler supply as the next cattle cycle begins. And without a significant pullback in total protein supplies, expect cattle and beef price rallies to come under more pressure in the next cattle cycle.

Per capita consumption of the top three animal proteins came in just short of 210 lbs. per person in 2022 — a record high. Contrast this to when the U.S. cow herd rebuild started in 2014. Total per capita supplies were at a 23-year low of 183 lbs. With inflation reducing the spending power of the U.S. dollar by nearly 15% since spring 2020, there will be ample competition for beef in the domestic market — at a cheaper price.

Furthermore, increased competition for feed grains and oilseeds is changing the cost structure for livestock and poultry operators as the beef industry transitions into the next cattle cycle. Prices for feedstuffs have adjusted to all-time highs the last two years with drought, global conflict, logistics disruptions, energy price increases, renewable energy market growth, higher farm input costs and a lack of feed alternatives.

The risk is that eventually the feed bill needs to be passed along to the consumer through higher beef prices. But as mentioned earlier, ample pork and poultry supplies offer cheaper alternatives. Consumer pushback could limit beef and cattle market upside and stifle upstream demand for feeder cattle and calves if higher feed prices persist.

Another daunting challenge for a cow-calf segment approaching the next herd rebuild is rising interest rates. The next expansion phase has not even materialized, and the prime loan rate is at 7.5% — exactly double what it was in 2014. All else equal, cow-calf producers will pay an extra $400 per head in interest for a $2,000 bred heifer today compared to one at the beginning of the previous cattle cycle if rates hold steady from here. The total interest payment would be nearly 2.5 times the size of the one made during the previous rebuild (Figure 1).

From 2009 to late 2015, the bank prime loan rate remained unchanged at historical lows of 3.25%. Those low-interest rates removed a significant barrier of entry at the start of the nation’s previous cow herd expansion. Rates did increase from 2016 to 2019 at a rate of around 0.25 percentage points every 4.5 months on average during that period — ultimately peaking at 5.5%.

Higher interest rates go beyond simply increasing breakeven costs for cow-calf operators. They also temper enthusiasm and limit the aggressiveness of the next cattle cycle.

New producers will most likely be more limited in their ability to enter the marketplace, and existing producers will be less likely to take on the risk associated with expanding a cattle operation compared to the beginning of the current cycle.

The book has not closed on the recent cattle cycle just yet. The U.S. cow-calf producer is still locked in a herd liquidation mindset today. Even if cow slaughter slows and heifer retention improves, it could be two more years until the breeding herd stabilizes and the thought of rebuilding materializes. Until then, the entire U.S. beef sector needs to prepare for a relatively fluid supply situation that will take years to work through the system.

Rabobank Group is a global financial services leader providing wholesale and retail banking, leasing, and real estate services in more than 38 countries worldwide. Founded over a century ago, Rabobank today is one of the world’s largest banks with over $660 billion in assets. In the Americas, Rabobank is a premier bank to the food, agribusiness and beverage industry, providing sector expertise, strategic counsel and tailored financial solutions to clients across the entire food value chain. Additional information is available on our website or on our social media platforms, including Twitter and LinkedIn.

Rabo AgriFinance, a subsidiary of Rabobank, is a leading financial services provider for farmers, ranchers and agribusinesses in the United States. To learn more about Rabo AgriFinance and its comprehensive suite of financial solutions, go to www.RaboAg.com.

How Producers Can Prepare for FDA Guidance #263

By Julia Herman, DVM, MS

Beef Cattle Specialist Veterinarian, NCBA, a contractor to the Beef Checkoff Cattle producers prioritize animal health and welfare daily. Part of responsible cattle care is utilizing the tools we have judiciously and at the appropriate times. The Beef Checkoff-funded Beef Quality Assurance (BQA) program has produced guidelines on the judicious use of antimicrobials that the cattle industry has been following for many years. The threat of antimicrobial resistance is very real, and the agricultural industry is working towards minimizing its risks. Using antibiotics judiciously can help slow the rate of potential antimicrobial resistance development and keep these products working longer. Efforts to combat antimicrobial resistance are present in both human and animal health realms.

As mentioned in December’s issue of National Cattlemen, the Food and Drug Administration (FDA) Center for Veterinary Medicine (CVM) will implement their Guidance for Industry (GFI) #263 which instructs animal drug companies to voluntarily change labels so that antibiotics, which are medically important for human medicine and currently available over-the-counter (OTC) for animals, will require a prescription from a licensed veterinarian for legal use. These product labels will be transitioned from OTC to “prescription only” over the next few months. In practical terms, this means that livestock producers will need an established veterinarian-client-patient relationship (VCPR) before purchasing prescription antibiotics.

A VCPR is legally defined by state and federal statutes as well as by the American Veterinary Medical Association. An established VCPR allows the veterinarian to diagnose and treat animals, prescribe medications, and issue Certificates of Veterinary Inspection (CVIs) or health certificates. Because the VCPR is required to be renewed annually, a yearly consultation with your veterinarian is recommended where multiple facets of the operation are evaluated, goals for the next year are set, and potential interventions are considered. This meeting and farm visit can provide in-depth understanding of the operation’s capabilities and limitations which can help shape future recommendations. For those producers who already have an established VCPR, they will likely not see much change after the guidance is enacted.

FDA Guidance #263 will be fully enacted in June 2023, and the first preparation step that producers can do is establish a VCPR. BQA has an example VCPR on their website (bqa.org) for producers to use. Cattle producers who do not regularly consult with a veterinarian or have an existing VCPR will need to work on establishing one prior to the deadline. The benefits of a VCPR go well beyond prescription writing, as veterinarians can be a valued partner on the cattle operation. Developing annual vaccination, feed sampling, nutrition consults, biosecurity or

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