It seemed like it took forever.

Then finally at the end of February, calf and feeder prices quit treading water and began to bloom, ultimately $10-$15/cwt. higher than the previous year. This strength continued through the spring, for the most part, as feedlots—some of them profitable for the first time in two years—scrambled after the dwindling supply of calves.

“Livestock producers have seen a return to profitability in the past two months after going through probably the worst economic situation anyone can remember in 2008 and 2009,” said John Anderson, livestock economist for the American Farm Bureau Federation, in May.

In fact, analysts with the Livestock Marketing Information Center (LMIC) say Cow-calf producers are on track to net the most economic return this year since 2006.

“For 2008 and 2009, on a per cow basis, the estimated cash returns were in the red (about -$18 per cow in 2008 and -$34 in 2009),” explain the LMIC analysts. “Earlier forecasts were for returns to return into the black for 2010. The recent update put the estimated cash return for 2010 at just over $50 per cow, an increase of about $20 compared to estimates made earlier this year. If realized, 2010 cow-calf returns will be the highest since at least 2006.”

The LMIC-estimated annual cow-calf returns—calculated as cash returns over all cash costs plus rent—are for a typical Southern plains commercial operation. The organization has made the calculation since the mid-1970’s on a per cow basis.

The upswing in prices and profit potentail has everything to do with the projection for higher fed cattle prices than expected when the year began, higher projected calf and feeder prices this coming Fall, as well as the fact that input costs are expected to remain fairly flat.

Winter tightened Snug Supplies
Much of the added potential comes in good old fashioned supply fundamentals.

First off, the nation’s cattle herd (beef and dairy) that began the year was the smallest since 1952. Combined U.S. and Canadian beef cattle numbers were down 1.4% January 1 this year; they were down twice that a year earlier.

Then came winter.

“The average closeout weight for steers in April was 1,275 lbs. compared to 1,293 lbs. last year, while heifers closed out at an average 1,182 lbs., 29 lbs. lighter than 2009’s,” say LMIC analysts. “Steer and heifer weights this year have averaged below last year and the 2004-2008 average each month.” That’s based on the Kansas State University Focus on Feedlots Survey.

As supplies declined faster than expected and prices climbed, both cattle feeders and cow-calf producers pulled cattle forward to take advantage. That further pounded tonnage and supply.

“Marketings as a percentage of the cattle on feed inventory have been over 17% this spring, and the number of cattle on feed for more than 120 days dropped 8.8% on May 1 relative to a year ago.” explained Darrell Mark, an agricultural economist with the University of Nebraska in a June edition of In the Cattle Markets. “Because cattle were marketed so timely, the lower carcass weights observed since winter have generally remained.”

Though excess feeding capacity remained supportive of calf and feeder prices, it took a return to feedlot profitability to unleash them. According to data from the USDA Economic Research Service, the first quarter of this year was the first time cattle feeding margins were positive since the same quarter in 2008.

Part of that is due to fed cattle prices, but also to declining costs.

“Athough cost of gains for April steer closeouts were$3-$5/cwt. above those of last fall, projected cost of gains for May placed cattle, if realized, would be the lowest reported for the month of May since 2006,” say LMIC analysts. “Feeding costs of gain continued to decline for steers and heifers sold in April as corn and hay prices have softened to levels not seen since before 2007. For the month of April, the average cost of gain for steers was $75.84/cwt., over $9.00/cwt. less than in 2009, while the cost of gain for heifers at $78.27/cwt. was $11.00/cwt. lower.

According to LMIC, weekly average (5-market) slaughter steer prices this year topped out at $99.88/cwt. (week ending May 15). LMIC forecasts the 5-market steer price this summer quarter to average in the high $80’s to low $90’s per hundredweight. “That would be about 8% above 2009’s. and the highest summer quarter average since 2008,” say LMIC analysts. “Seasonally, higher fed cattle prices are forecast for the fourth quarter of 2010; look for pries to return to the low to mid 90’s per hundredweight in the last quarter of this year (9%-12% above 2009’s). For calendar year 2010, fed cattle prices will likely average over $90/cwt. for only the third time in history.”

Consumers have more Jingle to Spend
On the other side of the equation, consumer demand shows signs of increasing domestically as the economy takes another step toward recovery.

According to Anderson, “Department of Commerce data shows consumer spending at food service and accommodations facilities grew at a remarkable 8% rate (quarter over quarter) in the first quarter of 2010. This was the first quarter-over-quarter increase since the second quarter of 2008. The National Restaurant Association’s Restaurant Performance Index for March indicated that the restaurant industry entered an expansionary phase for the first time in 29 months.”

Growing international demand is even more pronounced

“For this fiscal year, U.S. agricultural exports have experienced the best six-month performance on record. U.S. agricultural products exported in the first half of Fiscal Year (FY) 2010 totaled $59 billion. This figure is more than $7 billion greater than the same period in FY 2009. We want to help you build on this success,” said John Brewer, administrator of USDA’s Foreign Agricultural Service speaking at the U.S. Meat Export Federation (USMEF) Board of Directors Meeting and Product Showcase in May.

According to May’s USDA Outlook for U.S. Agricultural Trade, “Fiscal 2010 agricultural exports are forecast at $104.5 billion, up $4.5 billion from the February forecast and $7.9 billion above final FY 2009 exports. Strong oilseed and grain shipments support the overall export forecast.”

Beef and beef variety meat export value topped year-ago level by 27%, according to USMEF, and was about 10% higher than in April 2003, the last year of “pre-BSE” market access. April results were even more impressive when focused solely on muscle cuts. Beef muscle cut value ($268 million) was up 37% from a year ago.

There are a couple of compelling caveats to keep in mind regarding beef demand. First, is the nascent domestic and global economic recovery (see Slow and Steady). Pocketbooks and nerves are fragile enough to retreat in a hurry. Second, packers took a while to pass the higher input cost of fed cattle along to their customers in the form of higher wholesale prices. As they do, shoppers may become more hesitant.

Put it all together, though, and profitability is returning to the cow-calf business.

“A significant rebound in cow-calf returns in 2010 will set the stage for stabilizing the size of the U.S. beef cowherd, especially in 2011,” LMIC analysts said.

Though there was nominal cowherd expansion in 2005 and 2006, for all practical purposes beef cow liquidation has continued since 1996. Even though prices began looking up last winter, beef cow slaughter continues, and placement of heifers on feeds continues at high levels.

Spun differently, analysts with the Agricultural Marketing Service explained in June, “Year to date beef cow slaughter is over 10% higher than last year, nearly 18% larger than the 5-year average, and is even running about 2% more than 2008, which was a massive herd reduction year.

In other words, as an industry, ain’t nobody rushing out to expand.

But they will, eventually.

At this springs annual meeting of the Texas and Southwest Cattle Raisers Association, Randy Blach, CattleFax Chief Executive officer said calves should be worth another $30-$40/cwt. when they hit a cyclical price peak in 2013-14. “If you’ve got the feed resources, I don’t know that I’ve seen a better time than where we’re at right now to grow numbers,” Blach said.

Tack Down the Shingles
Depending on how many cow-calf producers choose to expand (see Fish or Cut Bait page 50) and how fast, the inevitable cyclical down turn to the current ride up could be flatter than a saddle fender. In fact, as with the current extended liquidation phase, one could rationally argue that growing global population and financial wherewithal could lengthen and increase the upside to a new price plateau. Depending on what input costs do, profit could ride along.

No one has that answer. Instead, everyone is privy to the realization that survival in a breakeven commodity business demands growing cost efficiency. And, it appears everyone has some time of profit to evaluate and implement new ways to do that.

One place to start considering the possibilities is by reviewing what it is that separates the highest and lowest return operators, no matter the height or depth of price levels.

For instance, an analysis from Kansas State University (KSU) indicates 77.2% of the average net return to management is due to cost rather than income per cow. “This is not unexpected in a commodity market where producers are basically price takers, i.e., the ability to differentiate oneself financially from the average is typically done through cost management,” say KSU researchers, Kevin Dhuyvetter and Michael Langemeier.

The KSU study examines records for 2004-2008 for producers enrolled in the Kansas Farm Management Association. There was an average $371.42/cow annual difference in net return to management between the lowest third of producers and the highest third (Table 1).

“The factor that is extremely important regarding profit and cost differences between producers is how well they manage/control their non-feed costs,” say Dhuyvetter and Langemeier. “Producers that had a high percentage of their total costs as feed (i.e., a low percentage as non-feed) had significantly lower costs and hence significantly higher profits. One of the ways to manage these non-feed costs is operation size as larger operations tended to have lower costs per cow for labor and especially for machinery and depreciation.”

So, lots of producers have plenty of opportunity to improve net returns. “However, before one can improve their situation they need to know where they stand relative to other producers,” say Dhuyvetter and Langemeier. “Thus, benchmarking and identifying ones strengths and weaknesses is the first step to deciding where to focus management efforts.”

Find the KSU study, Differences Between High, Medium, and Low Profit Cow-Calf Producers: An Analysis of 2004-2008 Kansas Farm Management Association Cow-Calf Enterprise, at http://www.agmanager.info/livestock/budgets/production/beef/Cow-calf_EnterpriseAnalysis(Jun2009)--Revised(Jan2010).pdf

SIDEBAR: JUST RIGHT - Time honing herd efficiency is better spent on things other than cow size.

Increasing herd efficiency through cow size is a whole lot like fixing a leak in the hose by turning off the hydrant. There’s a connection, but changing things on one end doesn’t take care of the problem on the other.

At least that’s the reasonable conclusion drawn by comprehensive research conducted by researchers at the King Ranch Institute for Ranch Management (KRIRM).

“The most efficient cow is the one with the highest milk potential that can, without reducing the percentage of calves successfully weaned, repeatedly produce a calf by bulls with the growth and carcass characteristics valued most in the marketplace,” explained Barry Dunn, then KRIRM Executive Director; now dean of the College of Agriculture and Biological Sciences at South Dakota State University. He and fellow researchers, Jennifer Johnson and J.D. Radakovich, presented their findings at the Cattlemen’s College in January.

Incidentally, the KRIRM folks say pounds of calf weaned per cow exposed is the most effective measure of cow efficiency because it accounts for reproduction. Return on investment is the most effective measure of economic efficiency.

Metabolic Weight and Live Weight are Different
Yes, for the same amount of feed resources, you can run more cows of smaller sizes or fewer cows of larger sizes, in general terms. Based on inherent cow efficiency, though, either size can provide the most net return.

For one thing, the KRIRM crew pointed out live cow weight and metabolic cow weight are not the same. They explained Kleiber’s Law, which quantifies how it is that larger animals utilize nutritional energy more effectively than smaller ones.

“The biology of maintenance energy requirements dictates that while a larger cow will consume more feed than a smaller cow, its additional feed requirements, as a percentage, are less than its additional weight, as a percentage,” say the researchers. “For example, though a 1,200-pound cow weighs 20 percent more than a 1,000-pound cow, the feed requirements of the heavier cow are only 13 percent more.”

So, when all of the costs are considered, running more smaller cattle can actually cost you more total dollars.

“If herd size is adjusted correctly, switching from larger to smaller cattle will not increase total fixed costs or feed costs, but will increase variable costs, as well as investment costs in terms of cattle inventory,” the researchers explained.

Dallied to a different saddle, for a given feed resource, the cost is the same, as well as the fixed costs of an operation. But, inventory costs increase with the number of head, as do variable costs such as bulls required, marketing cost and the like.

“Therefore, the gross income generated by selling a greater number of lighter calves must outweigh the additional variable and investment costs in order to justify the decrease in cow size,” said the KRIRM researchers. “Alternately, switching from smaller cows to larger cattle will decrease variable and investment costs, with no change to fixed costs or feed costs. However, producers in highly variable feed environments may benefit from a greater number of smaller cattle because of the economic risk associated with low reproduction rates of larger cows if supplemental feed is unavailable or expensive.”

That of course assumes reproductive risk can’t be mitigated some other way, such as through strategically managed maternal heterosis.

The researchers cite Larry Cundiff from 1993: “Crossbreeding systems that exploit heterosis and complimentarity and match genetic potential with market targets, feed resources and climate provides the most effective means of breeding for production efficiency.” Cundiff was research leader of U.S. Meat Animal Research Center Genetics and Breeding Research Unit for better than three decades.

Bull Selection—Heterosis provide more Efficiency Opportunity
Bottom line, trying to improve cow herd efficiency via cow size is ineffective at best.
According to the KRIRM researchers: “Selecting for genetic change in a cow herd through female culling is not an effective method for changing the overall efficiency of a commercial cow herd for several reasons. First, cattle in the commercial herd have long generation intervals which make genetic change extremely slow. Secondly, the selection differential for efficiency within the same herd is probably smaller than is commonly held and cannot be effectively and reliably measured. Thirdly, culling based on traits with low heritability is ineffective. Also, since an individual cow contributes little to the overall genetic makeup of a calf crop, it is much more effective to select for efficiency through bulls.”

Besides, there is no single correct answer for the industry. Optimum cow size lending itself to optimum production and economic efficiency varies by operation, hinging upon the environment, feed resources, market, goals and more.

“As long as cow type fits within the environmental and economic guardrails of an operation, cow size has little impact on profitability,” Radakovich explains. “If you have cows that breed up in their environment and their calves can be marketed without discounts, size really doesn’t make that much difference.

Radakovich emphasized “If you need to change efficiency, you need to do it with crossbreeding or bull selection…We don’t need better cow sizes for our ranch managers, we need better managers for our cow sizes…Heterosis is real, effective, probably the best tool a manager has in his tool box.”

You can find the complete paper, Producing Right Sized Cows, presented at the 2010 Cattlemen’s College at: http://www.beefusa.org/uDocs/2010 NCBA Cow Efficiency