Beef is Now a High-Stakes Gamble

How high is your beef risk tolerance?

Published on: Apr 29, 2011

For those growing up with a $50 fed market (or less) and $1.50 corn, today's beef numbers are mind boggling! And they may be the only ones who can afford to play beef's gambling game.

At this writing, high-quality fat cattle are selling above $1.20 a pound. Lighter weight feeder cattle keep nudging the $1.50 mark. Reports from the Far West say 500-pounders are touching $1.70.

This is exciting, yet scary! Once inconsequential beef losses now become huge.

Having a "hot bug" go through a group of calves worth $400 each is bad enough. Now, lose a few of them worth $750 each is catastrophic!

Today's high-stakes dollars put risks at a whole new level. For every $100,000 required to run your business 15 years ago, you'd need over $180,000 today!

Biggest question: What's ahead?

Feedlot operators have to be the most nervous people in the country. They're facing record feeder prices, a largely unknown 2011 corn market and a totally unknown fed market once those calves reach market weight. It's enough to make a weekend in Las Vegas look like easy money!

Here are a few of the more critical risk factors affecting our future:

* When will the cow herd expand? While the cow-calf segment has been profitable, total beef cattle inventories declined from a high of about 103 million head in 1996 to about 93 million this year.

Early signs of expansion are very recent. We're seeing higher prices for open yearling heifers, an intention to retain more heifers, and even for "heifer bulls".

* Corn and oil: Crude oil recently rose to $113 per barrel. About five years ago, an economic model related the price of oil to gasoline, ethanol and corn prices.

It's almost scary-accurate. At $100 a barrel, the model predicted $3.45 gasoline, $2.81 ethanol and $6.81 corn.

* Corn and ethanol: A new political mood is developing to end the government's ethanol subsidy – costing taxpayers about $5.4 billion. Cattlemen have long sought a "level playing field" in the fuel vs. feed competition.

On the other hand, U.S. EPA has approved a blending limit of 15% ethanol in our gas, up from 10%. It'll be very interesting to see what happens next year if the ethanol subsidy disappears.

* Corn and weather: USDA has forecasted a 160-bushel corn crop on 92 million acres. With normal harvest losses, that would net about 13.5 billion bushels – a record crop, but not enough to rebuild the carryover we should have.

We've already seen widespread early-spring planting delays. Those 13.5 billion bushels are a long way off with lots of variable weather between now and fall harvest.

* Beef exports: This better-than-expected story is getting better all the time. 2010 exports were up almost 20% over 2009, and are expected to remain strong into 2012.

We now export about 10% of our beef. And, the declining U.S. dollar's value makes our beef a bargain for many foreign countries.

* Domestic demand: If $120-plus fed beef continues, it'll markedly affect retail demand. At some point, demand will decline as consumers move to cheaper meats. We may find that point soon.

High prices don't necessarily mean high profits, especially if you're buying calves to feed out. Nevertheless, opportunities are there for those who'll seize them – along with the risks!

Harpster is a Penn State animal scientist and a beef cow-calf producer.