Beef cow culling has been an important story this year and SAT has discussed it a couple of times, but last week beef cow slaughter topped 80 thousand head for the first time since 2012, making it worth looking at again. So far in 2022, beef cow slaughter is 15 percent higher than the same period in 2021. This is equal to approximately 200 thousand more head of beef cows processed this year. Beef cow slaughter averaged about 65 thousand head per week in 2021, but is averaging about 75 thousand head per week in 2022.
Drought, higher feed and other input costs, and stronger cull cow prices continue to be the likely reasons behind the increase. Looking at the regional slaughter data, it appears that beef cow slaughter has increased more in areas with drought. Beef cow slaughter in Region 6 (AR, LA, NM, OK, and TX) is up 30 percent over 2021 and region 7 (IA, KS, MO, & NE) is up 29 percent. However, beef slaughter is also about 20 percent higher in Region 4 (AL, FL, GA, KY, MS, NC, SC & TN) where drought has not been an issue. Beef cow slaughter continues to indicate contraction of the U.S. beef cow herd in 2022.
Lightweight calf prices have dropped dramatically in recent weeks, responding to high feed costs and lower fed cattle futures prices. In the Southern Plains, calf prices have fallen by more than the normal early summer seasonal decline and may reflect some more drought forced sales. Heavy weight steers in the South have declined more than those in the Southern Plains, likely impacted by increased hauling costs as diesel fuel prices hit record highs.
Hay production is one of the largest and most economically significant agricultural enterprises in Alabama with 700,000 acres farmed producing 2,170,000 tons of product valued at $217,000,000 (USDA-NASS). Hay is used as livestock feed for cattle, horses, and small ruminants. Hay can also be used as bedding, mulch, decoration, and numerous other uses. Price ranges for hay sales often depend on variety baled, the size and structure of bales, and the quality of the bale.
Prices of inputs used in agricultural production have increased in 2022 throughout the United States. Fertilizer, chemical, and fuel costs have increased significantly, leading to even more questions as to how producers should price hay to their hay consumers (and likewise what livestock producers should be willing to pay). The costs of nitrogen, phosphate, and potash used to produce a round bale of bermudagrass hay has increased 95% from May 2021 to May 2022.
Know Cost of Production
Hay producers must know their cost of production, including both fixed and variable costs. They must also determine the minimum profit margin they are willing to accept for their product. Both cost of production and acceptable profit margin will vary greatly among producers and careful consideration should be given to both.
Cost of production can be broken down into two segments: variable costs and fixed costs. Variable costs are the costs that change as our production changes, such as fertilizer. Variable costs only occur if we produce. However, as producers increase production, the amount of nutrients removed from the soil will also increase and therefore the cost of maintaining production and fertility will increase significantly.
Based on the ACES Enterprise Budgets for round bale bermudagrass hay, variable cost of production has increased 64% from May 2021 to May 2022. While this is driven primarily from higher fertilizer prices, one can see that all other costs, except the price of the soil test, has increased. We estimate the 2022 variable cost of production to be $71.88 per 1000-pound bale, up from $43.87 in 2021.
Fixed costs on the other hand will occur whether producers are actively farming or not. An easy example of fixed costs would be land taxes and depreciation – both of these happen whether the producer spreads fertilizer, cuts hay, or doesn’t do anything. Producers should take into account all of the equipment, land, tax, insurance and other fixed costs that are often ignored when budgeting costs for hay production.
Consider Profit Margins
There are factors beyond the cost of production that also need to be considered when pricing hay. The profit margin that producers are willing to accept is a necessary consideration. Margins can be a percentage of costs or a dollar value per unit of production and is based on the amount of profit one expects or needs on a given enterprise unit. This will vary significantly by producer and situation. Ultimately each producer must assess his own cost of production and his own acceptable profit margin when pricing their hay – and each producer might be different than his neighbor.
While a price should first consider the cost of production and profit margin, one must also consider what consumers will be willing to pay. Purchasers of hay are going to consider alternative feeds and the relative price of those alternatives. If the price of alternatives has not increased much, consumers may be willing to switch to other products. Calf prices will dictate what a buyer is willing to pay. Competing products may also simply be hay from an alternative seller in a neighboring county or farther geographic location. Long-term relationships with buyers may also be circumstances where a producer may choose to limit their expected profit margin to keep current customers happy. Finally, dry weather that may reduce current or expected future supply of hay will lead to higher prices.
Kelley, Ken, Adam Rabinowitz, Max Runge, and Wendiam Sawadgo. “Pricing Hay for Profit.” Southern Ag Today 2(23.2). May 31, 2022. Permalink
USDA released the May Cattle on Feed report on Friday, May 20th and it showed continued large numbers of cattle on feed. Placements, marketings, and cattle on feed were 99.1, 97.8, and 101.7 percent of a year ago, respectively. Placements and the number on feed were larger than the average pre-report estimates and so the report was regarded as being a negative one for the market.
The report was important in terms of calf price expectations for later this year. Placements were 99.1 percent of a year ago, 1.809 million head. For the January-April period, 7.651 million feeders have been placed. That is the second largest number, behind only 2019, in the last 20 years. Maybe more important, it is the largest number of placements as a percent of January 1 cattle outside of feedlots. Placements this year have totaled 30 percent of the January 1 feeder cattle supplies. Again, more evidence of pulling feeders ahead and it implies tighter supplies of feeder cattle as the year goes on. Those tighter supplies should translate into higher calf and feeder prices.
The next quarterly cattle on feed report will have some more evidence of heifers on feed. Given the rate of placements of available feeder cattle, heifers as a percent of cattle on feed should remain large, meaning continued herd contraction from the replacement side, as well as the cow side.
The latest CPC-IRI Forecast of the Niño/Southern Oscillation has increased the probability of being in a Niña season through summer and fall (Graph 1). La Niña patterns typically bring drought to the Southern Plains. The risk of continuing to suffer the consequences of being in a drought is increasing day after day. The chance of a third consecutive Niña, is rising. The sooner we get prepared for it, the higher our chances of successfully implementing a drought management plan, saving costs, and having a solid business in the future.
Graph 1. CPC-IRI Official Probabilistic ENSO Forecast.
Most cow-calf production is highly dependent on rainfall. With very high input and feeding costs, a drought management plan should incorporate more than one strategy to lessen adverse economic impacts. It should also consider future restocking strategies given the business’s financial position, long-term profitability, cash-flow, years to rebuild your livestock equity lost during drought, and other productive variables such as forage productivity, genetics, or leasing alternatives.
Our model analyzed the impact of integrating drought management practices to mitigate losses and reduce risk (https://vernon.tamu.edu/extension-projects/d3-agricultural-economics/). Integrating these proactive and reactive strategies such as early weaning, early culling, pre-stocking hay, destocking, and restocking strategies has a significantly higher economic and financial impact than each strategy. These strategies resulted in a $426 saving per breeding cow unit (BCU) during year one.
Other pro-active strategies like USDA’s Pasture, Rangeland, and Forage Insurance (PRF) are essential tools that can be implemented in many cases. PRF showed a positive net benefit in many cases, but most importantly, it generated significant payments in drought years when it was needed most.
Unfortunately, droughts always have a negative effect on our companies. Waiting for it to rain to solve problems has not always been the best solution. These types of tools will help you prepare your operation given your production data, financial position, experience, and future expectations.
Last week’s Crop Progress Report from USDA provided the first data point on 2022 pasture and range conditions. Like other crops, the Crop Progress Report shows the percent of pasture in very poor, poor, fair, good, and excellent condition. According to the report, 29% of pasture is in very poor condition. Combined, 56% of pasture is in very poor or poor condition. Last year, 47% of pasture was in very poor or poor condition. Clearly, on a national basis, pasture conditions are worse than a year ago.
There is a high degree of variability in range and pasture conditions across states. In the Southeast, for example, conditions are comparable to the previous 5-year average, with 10% of pasture in poor or very poor condition (AL 4%; AR 13%; FL 22%; GA 13%; KY 6%; LA 8%; MS 8%; TN 7%). In the Southern Plains, conditions are noticeably worse, with 57% of pasture rated as poor or very poor (KS 41%; OK 39%; TX 74%), a 79% increase compared to last year. Compared to last year, conditions in the West have improved, with 39% of pasture rated as poor or very poor, down 24% compared to last year.
Forage availability and forage production costs will be two of the most significant factors determining the trajectory of U.S. cattle inventories through 2023. So far, in 2022, we have already started to see the effects of deteriorating pasture conditions. Feedlot inventories continue to set records, partially a result of drought pressure. Beef cow slaughter is averaging 17% higher year over year. The next few months will be crucial to monitor.
