Withering field crops stole all the headlines this year about the drought in the United States, but livestock producers have been hit even harder because not only are their herds suffering, but skyrocketing crop prices make it more costly to feed their animals.
Livestock producers are starting to make the hard decision to liquidate herds, with evidence of heavy hen, sow and some beef-cow slaughter rising. Dairy producers are also seeing more dairy-cow slaughter as dairies have been dealing with bearish fundamentals for a few years now.
The situation in the livestock industry isn’t likely to improve this year, industry watchers say, although brighter horizons might be in store for producers, provided they can hang on during the present dark times.
“Higher feed costs alongside poor pasture/range conditions have halted expansion plans,” says Christina McGlone-Hahn, analyst at Deutsche Bank in a September research note. “The livestock sector is now in liquidation mode.”
Jason Henderson, vice president and Omaha branch executive at the Kansas City Federal Reserve, says that the herd liquidation was anticipated, and that it’s likely to persist.
“Producers are looking at losses until the end of the year,” he says.
Henderson says producers were expected to cull their younger animals. “Right now dairy and poultry are making the biggest (herd and flock) adjustments,” he says.
McGlone-Hahn says bigger hens are being slaughtered because they use corn less efficiently, which is dropping chicken weights overall. Further signs of flock reduction are seen in USDA’s weekly broiler data, showing egg sets down, despite a comparison against last year’s deep production cuts.
She added that dairy-cow slaughter is up two percent year-over-year, with the pace accelerating in August.
Margins are being squeezed for livestock producers, and some are already in the red. For instance, McGlone-Hahn estimates that hog producers are now losing about $25 a head, and that loss could grow to $60-$70 a head. Weakness in thecash hog and pork market suggests that the typical autumn rise in slaughter rates is being exacerbated by higher liquidation levels.
As of mid-November, total weekly hog kill numbers are running two percent ahead of last year. She attributes this rise to producers holding off on marketing hogs during the hottest days of the summer, and to an effort by producers to send hogs off sooner to bring down feed costs.
Cattle Operators Teetering
“Drought has decimated pastures in the United States, with 60 percent of pastures in poor and very poor condition versus 40 percent a year ago,” says David Anderson, a livestock economist at Texas A&M extension service. “Drought in Texas wasn’t as bad as last year – which was the worst year on record – but given much of the rest of the country is in drought this year, cattle producers are still struggling,” he says.
“A lot of cattle liquidation happened last year in Texas, the biggest cattle-producing state,” Anderson says, but calf prices have fallen sharply as cattle producers were reluctant to cull herds they just rebuilt.
Even though calf prices were up earlier this year, he says given the drop in prices in the summer, it’s likely average 2012 prices will be below last year, and furthermore, prices could stay weak into the first six months of 2013.
On the feeder-cattle side, Henderson says there’s been a rise in feeder-cattle imports from Mexico because of the drought, which is pressuring markets. Meanwhile, Canada is sending hogs and cattle south, taking advantage of currency rate differentials.
Cattle feedlot operators are battling low prices for fed-cattle and high feed costs. Henderson cited a USDA statistic that estimated feedlot operations may lose more than $200 per head this year.
The rise in animals sent to slaughter is putting some strain on processing capacity, and that’s pressuring prices and processor margins, Henderson says. “It will take time for prices to recover as big supplies come in…. You have to wait until 2013 for things to improve,” he says.
Henderson and Anderson say 2013 should treat livestock producers better, but the big question is, can producers hang on?
“It might be a year before they’re profitable again. One thing you have to remember is that you have to go through this downturn before you get a rebound,” Henderson says.
So what will be the signs of a bottom? “You’ll see the rebound first in poultry. They’re the first sector to look at because their life cycle is so short. If you see a rebound in poultry, there’s a good sign that it will occur in hogs,” he says.