Beef Buzz News
As Supplies Tighten, Lance Zimmerman sees Beef Cattle Supply Chain Increasing to Some Degree in the Next YearFri, 22 Jul 2022 08:07:04 CDT
Only .003 percent of Oklahoma is abnormally dry, but the rest of the state is in moderate drought or worse. Over in Texas, they are facing 95 percent moderate drought or worse and Kansas is at 54 percent. Senior Farm and Ranch Broadcaster, Ron Hays, is back with Rabobank’s Senior Beef Analyst, Lance Zimmerman, who says it is going to be difficult to source hay going into the winter as producers try to hold up their cow herd numbers.
Hays and Zimmerman talk about the effects of drought on the cow market and the implications of capacity expansion in packing plants.
“As we look at what is going on right now with fuel costs, it changes the math for a lot of different things,” Zimmerman said. “Hay and the mobility of hay, but also the cash price for corn versus the futures price.”
Zimmerman said he has seen feedlots in western Kansas getting bids for late summer or early fall crops at two dollars over the futures board locally. Looking at the North and South spread in fed cattle cash prices, Zimmerman said between the Nebraska market and the Kansas or panhandle market, he is seeing seven-to-nine-dollar spreads.
“A good chunk of that spread is just the inability to arbitrage that market for a feed yard in Kansas to try and sell cattle up into the north,” Zimmerman said. “About half of that difference to a third of that price difference is the inability for those packers in the north to buy those cattle in the south and truck them up north.”
When we have these higher-priced transportation costs, Zimmerman said it causes the infrastructure of our industry to have to look more local, and it tightens the circle that is around each of these operations to try and procure the goods and services they need. Zimmerman said this will become more evident through the end of this year and into next year.
Looking at the industry, there is talk about more capacity coming as a result of the pandemic. Zimmerman said the aggressiveness of the liquidation over the last 12 months has caused a lot of those plans to have the breaks pumped on them.
“If we would have looked at the list of perspective expansions, new expansions, or new builds a year to 18 months ago, I would have told you even then, based on the history of how those things tend to work out, is the industry would be lucky to see half to a third of those made public expansions and new builds actually come to fruition,” Zimmerman said. “That is just normal. Permits in some areas don’t get approved, plans change, and construction costs were increasing with the pandemic and the calculus which is becoming more difficult. That tends to happen in these deals regardless.”
Based on what we knew 18 months ago, Zimmerman said only 20 percent of the capacity will go online.
“A lot of these folks are seeing the same numbers we are on the countryside, and they recognize that the moment this expansion comes online, the cattle market will be at its lows in terms of total numbers,” Zimmerman said. “As I look at it today, I think that is the biggest thing the processing segment is wrestling with.”
There was a desire to expand 18-24 months ago and the enthusiasm for that has paused, Zimmerman said, but we have gained capacity over the last year.
“We are seeing fed cattle, steer, and heifer slaughter periodically in here hit 100,000 head plus on some of these weekday Monday through Friday kill levels that are being reported by the government,” Zimmerman said. “We have seen it a handful of times over the course of the last several months.”
You have to go back to 2013 to find the last time we hit over 100,000 head on a weekday, Zimmerman said, and in a few instances in November and December of 2013 that summer, you have to go back to 2012 to see us as an industry hitting 100,000 head to 100,000 head plus on a weekday basis consistently.
“We are rebuilding that fed cattle supply chain,” Zimmerman said. “We are seeing a little bit more processing. What we have heard from a lot of the processing contacts that we work with is that Saturday slaughters have had to pull back.”
Zimmerman said it is not uncommon for Saturday slaughters to pull back.
“We were running 50,000 head very consistently on Saturdays last year,” Zimmerman said.
In 2014 and 2015, Zimmerman said Saturday slaughter was around 15,000 or 10,000 head at the most.
“What we are going to see through here is we will gain some capacity,” Zimmerman said. “Not as much as we would have thought a year and a half to two years ago.”
Capacity will be gained on a weekday basis, Zimmerman said, but the packers will give workers more freedom on Saturdays again.
Click the LISTEN BAR below to listen to Ron Hays and Lance Zimmerman talk drought implications and beef cattle supply chain outlook
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