Liquidation of Beef Herd One of the Largest Ever

September 26, 2011 08:52 PM

The largest liquidation ever could be under way in the beef industry. USDA’s Livestock Slaughter report, released Sept. 23, shows that the nation’s beef producers sent 22.8 million head to be commercially slaughtered during the January through August period, a 1% increase from the comparable period a year ago. For the month of August, commercial slaughter was 5% above July levels, at 3.1 million head.

Mark Nelson, an economist with the Kansas Farm Bureau, predicts that cattle numbers will be even tighter next year and in 2013. The liquidation that is occurring now is the largest or one of the largest drought-based liquidations ever, Nelson says.
Heifer numbers are also lower; the nation’s beef producers retained 5% fewer heifers than the previous year as of Jan. 1, according to estimates released by USDA earlier this year.
Nelson says that if current conditions—high corn and hay prices as well as severe drought in the Southwest—persist and liquidation occurs into the fall, the breeding herd could decline by as much as 7%. "This would be a loss of 2 million head of beef cows," he adds. "This is huge and could mean a reduction in cowherd numbers this country hasn’t seen since the early ’60s."
Monthly cattle slaughter in Texas rose to 629,600 head in August, a 7.7% increase over a year ago. Slaughter rates were also much higher year over year in California, Arizona, Nebraska, Colorado, Georgia, North Dakota, Oregon and Wisconsin.
La Niña has been blamed for the severe drought that has plagued the Southern Plains, particularly Texas. In August, after a brief hiatus, La Niña returned. "While it is not yet clear what the ultimate strength of this La Niña will be, La Niña conditions have returned and are expected to gradually strengthen and continue into the Northern Hemisphere winter 2011-12," writes the National Oceanic and Atmospheric Administration’s Climate Prediction Center in a recent outlook. And the Sept. 20 U.S. Drought Monitor Index already shows that the entire state of Texas is experiencing severe to extreme drought.
"Cow numbers continue to shrink," says Glynn Tonsor, livestock economist with Kansas State University. He expects continued tight supplies of both feeder cattle and calves over the next 12 months. "That means the value of calves and feeder cattle will be historically high," Tonsor notes.
Some in the corn industry refer to the mass liquidation as "demand destruction" and, indeed, lower numbers of cattle will reduce the amount of corn going into feed channels.
Price resistance, a rally in the U.S. dollar, and expected or better-than-expected harvest yields have already pressured corn prices substantially lower over the past month. The December corn contract lost 74 cents between Aug. 23 and Sept. 22. Whether the current price pressure persists is uncertain and will ultimately play a key role in whether lost demand returns to the market.
"If 50 cents falls off the corn price permanently, feedyards would be willing and able to pay more for feeder cattle based on expected returns," Tonsor says. For now, though, the outlook remains tight on both calves and feeder cattle through the next 12 months or so.
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