The Herd Rebuild Will Take Time: What Does That Mean for You? with Lance Zimmerman

Where’s the beef industry going? That’s a question we’d all like to answer. The closest we can get to reading the future is analyzing trends, and pairing that with historical data. Lance Zimmerman, senior beef and cattle analyst with Rabo AgriFinance, shares insights with today’s host, Miranda Reiman, from a recently published paper titled “Not So Fast. That herd rebuild will take time. “ 

They discuss: 

• How the herd contraction will affect prices for you.
• When we will start to see the national herd rebuild.
• Needed economic incentive.
• Beef demand trends and how that affects cattle producers.

This episode is sponsored by Lallemand Animal Nutrition. 

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Transcript

Hello and welcome to Angus at Work. Where's the beef industry going? That's a question we'd all like to answer, right? The closest thing we can get to reading the future is analyzing trends and pairing that with historical data. Today, Lance Zimmerman, senior beef and cattle analyst with Rabo AgriFinance shares insights with today's host, Miranda Reiman from a recently published paper titled Not So Fast. That Herd Rebuild Will Take Time. This episode is brought to you by Lallemand Animal Nutrition. So let's dig in.

Miranda Reiman:

Thanks for joining us, Lance.

Lance Zimmerman:

Yes, thank you for the invitation.

Miranda Reiman:

Why don't you start out by just giving us a little bit of background on what you do there at Rabo in that role?

Lance Zimmerman:

Yeah, it's fun being a research analyst for basically an Ag lending institution. So you think about the Angus Association and how it has a lot of subsidiaries and a lot of tentacles that branch out across all aspects of the beef industry and this job does too. Rabobank is one of the largest banks on the globe. A lot of folks may not know that it's actually based out of the Netherlands, but we have a massive presence in North America. And so I'm part of the North American food and Agri-business research team for Rabobank, and I get the opportunity to work with anyone from Cal calf producers on farm and ranches all throughout the United States to our packer processing friends, to anybody even that's selling finished consumer goods to U.S., Canadian, Mexican consumers. So I cover all aspects of the industry and get the chance to play in data, look at analyst trends, and just create networks and relationships across the industry.

Miranda Reiman:

That sounds like a fun position to be in, and it also seems like a good view to take on this topic of herd rebuilding.

Lance Zimmerman:

Yes.

Miranda Reiman:

That's kind of the, I would say going into this year that's been the thing that both leaves producers, depending on where you sit in the chain, producers very optimistic on prices or maybe a little bit pessimistic on where they're going to get cattle to fill their pens so.

Lance Zimmerman:

Yes, absolutely. I mean, whether you're a cow calf producer looking ahead to hopefully the next expansion, whether you're one of these investors and one of the new packing plant projects going on around the country or whether you're a consumer foods group trying to figure out how you're going to supply your meatcase or put an item on the menu in a supply environment that's going to be declining. Everybody's focused on the cow herd contraction we just went through as well as, okay, how quickly can we rebuild the herd from what we've declined from recently?

Miranda Reiman:

Sure. And we've had a lot of moisture here lately, at least in my part of the world, and I know I've seen that across the west and heard some weather forecasts here recently that were long-term outlets that were positive. So certain we are going to start rebuilding, but,

Lance Zimmerman:

Yes.

Miranda Reiman:

Give me a little bit of the lay of the land. When will that start happening? When can we see the results of that rebuilding?

Lance Zimmerman:

Exactly. Well, I think it's good to have a level set and understand, okay, where are we today? And obviously the cattle inventory report that came out giving us that boundary of where's the January one cowherd kind of serves as an excellent foundation to think about where can we go from here? And obviously let's focus on the beef cow number. We came in at 28.9 million head basically with all intents and purposes revisiting the 2014 lows, which were the lowest cow herd numbers we'd seen since 1962. As we navigate through that, unfortunately, even though we've had a lot of precipitation this winter through the northern plains, we haven't gotten that moisture drawn all the way down to Kansas, Oklahoma and Texas. We had record high liquidation this past year. We've had an ample number of heifers getting shipped off to feed yards instead of staying home at farm and ranches.

And as a result, we simply need the moisture trends to turn their tide. We need to see more moisture through the southern plains and obviously with cattle producers where they are today with calf prices where they're at, basically getting around a 1000, maybe $1,100 ahead for calf values, that's probably not enough to cover the feed bill with feed supplies as tight as they are, pasture inventories as low as they are. And so we need to see the calf market rebound and stay at elevated levels.

We need to see moisture conditions not just come and replenish what we lost, but have some staying power so that when we look across those prairies, they're healthy, green and vibrant again. When we look at our hay stocks, we have an ample supply to get us through a winter and then a little margin on the sides, and that's going to take a couple years, and that's really one of the aspects that the paper focuses on. Let's turn the tide on the heifer numbers, let's turn the tide on the cowherd slaughter that we've seen over the last several years. Let's get the green grass replenished and then we can start talking about a healthy robust expansion again. But we're probably still two years away before we can see that happen.

Miranda Reiman:

So that's a good point. When you mention, I tend to think, oh gosh, calf prices are up, this is really good. But that economic incentive you say isn't quite there yet. Are you predicting that it will be?

Lance Zimmerman:

Absolutely. I think one of the things that I'm struggling with, we know that the calf price has to come up. We've seen a great recovery in fed cattle prices. One of the things economists like to talk about that may be a somewhat new term for your listeners is retracement levels and all that is, is a fancy way of saying based on the down trend that we just went through in prices from the previous price highs in 14 to the bottom during the pandemic, how much of that loss have we already recovered. On the fed cattle side, we've recovered about 82% of that decline in price that we went through. But when you look at feeder cattle and calf prices, they've only recovered about 55% of that full decline. And a lot of that's because of the feed bill. We're not just looking at high pasture costs and high hay prices, we're also looking at incredibly high corn prices.

And so in order to get that bump to calf prices, we need a good pass through mechanism. We need feed prices to come down so feed yards can bid more aggressively for those calves. And let alone that we need to have a consumer that we can pass higher beef prices onto because even if demand holds steady, the declining supply environment alone will mean that beef prices have to go up and there's some headwinds we have to work through there. Inflationary pressures chipping away at income, just a lot of expenses getting passed onto consumers in an environment where we have very ample pork and poultry supplies, and so we got to keep that in mind going forward.

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Miranda Reiman:

I just had a conversation here today that somebody said. I'm a little bit worried about the high prices and what will consumers stand and all of that. Do you guys have a level that you think is how high is too high?

Lance Zimmerman:

No, that is a great question and I honestly, just like going through the pandemic, I don't think we know yet. The good news is retail beef prices are down from their all time highs. We set that in October of 2021, around 7.50 a pound retail across all commodity classes of beef. We're down about 7.15 a pound right now. So we have some upside where we can retest those all time highs, but honestly, as we navigate from where we were last year to where the cycle lows and beef supplies are, we're probably going to take 10% out of the beef supply, about five pounds a person. If that's the case in an environment where may we decline beef demand ever so slightly because of some of these pressures we talked about, but still maintain the long-term uptrend, it would suggest we need retail prices around 8.50, maybe even $9 a pound.

So that's where it needs to be. Now we got to ask ourselves, will the consumer pay that? And when you think about total beef, pork and poultry supplies, we're in a totally different environment than the last expansion. Back then, we were consuming 180 pounds of beef, pork and poultry. It was the tightest supply of those three proteins in the US since 1990. Today we're at 210 pounds of beef, pork and poultry and pork numbers look like they're going to stay pretty steady over the next several years. Broiler numbers can probably continue to ratchet just a little higher. Beef's going to decline about five pounds. So with that in the back of our heads, we're probably going to stay very well-supported with protein supplies around 220 pound, or sorry, 200 pounds, which is 20 pounds higher than where we were at the beginning of the last cycle.

Miranda Reiman:

Yeah, it's a good point that you can go back and look at history, but there's never a time that fits exactly perfect with what you're going through now.

Lance Zimmerman:

Miranda, I always joke that if you can't forecast accurately forecast often, and we've had to do that a lot over the last several years. We'll probably continue to do that, but we try to have as sharp of a pencil as we can and really painting these long-term trends is somewhat easier than just trying to time the market tomorrow or next month or at the end of the year during fall weening. The long run trends do tend to play out generally speaking, within the trend of expectations, sometimes the absolute highs and absolute lows need rewritten as we go, but I do think we're in a unique period where we got just a lot of stressors that we have to work through right now.

Miranda Reiman:

So on this podcast, we like to give producers kind of a practical nugget that they can take back knowing that they need to evaluate their own pasture forage situation and their own operations there. But if you were looking at it from a pure economic standpoint, when would be the best time to be expanding your herd?

Lance Zimmerman:

Absolutely. I've had that question a lot over the last several weeks of releasing this paper, and the one thing I tell cow calf producers is just remember, you're likely married to your spouse. You don't want to be married to some cows you don't like, and there's nothing to say about cows that we don't love except for cows that don't make money. Then even as much as we love them sometimes we got to let them go, and that heartbreak is real. So what I've been telling guys is let's be slow, let's be calculated, and let's be really good businessmen. Now is the time to really sharpen your pencil, calculate your break even, know what your cost of production are, and know where you can enter into the cow business and do so profitably. And for a lot of producers, what it's going to mean going forward is, especially if you're comfortable with the genetic base that you built up, start retaining those heifers.

And what's great is even if you sell the steer mates in this point in the cycle and you run those heifers through the winter and all of a sudden feed resources start getting tight, you can still sell them as feeder heifers late winter, early spring, and catch that up trend in the cattle market into that period. If you go ahead and you breed some, and by the time you get done with breeding pasture inventories, look a little tight, not as much green grass as you thought. Make a deep cut into them. Keep the bare minimum or decide to keep them and get rid of the poorest performing cows in your herd. But be slow. Don't jump in with both feet. Walk before you can run. Be very calculated and just put one foot in front of the other.

Miranda Reiman:

So I hear be slow and also be flexible a little bit in that plan.

Lance Zimmerman:

Absolutely. Great recap.

Miranda Reiman:

Well, is there anything else that you'd like to add? Otherwise, I'm going to ask you to tell me where people can find this paper.

Lance Zimmerman:

No, the one thing I would say is even though there's some short term headwinds, there's also a lot of great opportunity. We have some challenges, but one of the great things about our industry, when you look at any time over the last 50 plus years where we face challenges, one of the coolest things we did, and one of the great things Angus producers understand is that we leaned hard on the vertically coordinated supply chain. We work together segment across segment, whether it's like the Certified Angus Beef brand, which totally embodies that, or the beef checkoff or the beef quality assurance program or the beef quality audit. We're going through a different period and we're talking a lot about sustainability and a lot of other things like generational transfer and who owns the land and things of that nature.

I think we're going to see a new wave of vertically coordinated production. Maybe some of the current systems just evolve. Maybe we have some new systems that aren't even on the books yet, but I think that's going to be the key to rebuilding this cow herd. And I think that the prior highs at 32 million, we can hit them again and we can do it in a very prosperous way, but I think the creative will be rewarded.

Miranda Reiman:

That's a good note to end on. We always say that the cattle business is a people business. So tell me something good that's happened either personally or professionally. Give me some good news.

Lance Zimmerman:

Yeah. The great thing I love about this business, even amid the trials and challenges that come up is at the end of the day, it's a people business and it's in a business where we get to make a livelihood, one, caring for animals, and two, providing food for people. And even though I'm a market economist, even though I'm forced to calculate the numbers and crunch the trends, the greatest thing about this industry is we can have conversations like this. We can have feedback back and forth. You mentioned the research paper. That's out on our Rabo Research Food and Ag business website. They can Google that. They can scroll, they'll find the paper, and what's great is if they like it, give me a call. Let's talk about it. If they don't like something, read it. Call me up, let's talk about it, and we'll come together with some common solutions.

Miranda Reiman:

So I heard your something good was that you got to be interviewed on this podcast today.

Lance Zimmerman:

Absolutely. With great people.

Miranda Reiman:

Excellent. Thanks for joining us.

Speaker 1:

Listeners, to get more information to help make Angus work for you, check out the Angus Beef Bulletin and the Digital Angus Beef Bulletin Extra publications. You'll find links to subscribe to both of those in our show notes. We'll also link the paper Lance was referring to in the show notes. And we sure appreciate it if you would rate this podcast or leave a review to tell us what you learned or what was helpful, and share this episode with any other profit minded cattleman. And we are grateful to today's episode sponsor Lallemand Animal Nutrition. Thanks for listening. This has been Angus at Work.