Still waiting in line to get that steak will impact cattle market - Derrell Peel

Well, hello friends, Paul Yeager with you. This is the MtoM Show podcast, a production of Iowa PBS and the Market to Market to Market to Market to Market program, which you see all over in our studios here in Iowa. We're going to talk about cattle across the country today, our friend Derrell Peel at Oklahoma State University. He's an extension specialist in livestock. We had a great chat with him last year, many of you caught that we're going to test his knowledge about the most recent cattle inventory report, there was one headline that was easy to see. And that's some low numbers since the 1950s. Here's the thing. Mr. Peel has some, I won't say breaking news, but more news in that same vein for the coming year. One, year two, and maybe even year three, we're gonna get into what's going on on the farm in the feedlot at the packer door. And at the grocery store. We'll also talk about the restaurant and how that consumer factors into all of this discussion about the livestock market. If you have any feedback about the program or an idea, I'd love to hear from you. It's Paul.Yeager@IowaPBS.ORG. Now, let's talk livestock. What's the travel season like this year, you've been busy? 

Derrell Peel: I just got back about an hour and a half ago from Atlanta. I've been on the road for the last week.

[Yeager] What are people asking you? And so well, you know, 

[Peel]  I haven't done a lot of media stuff. But I haven't actually done any producer meetings. Since this report came out. I've written a couple of things. I've done a bunch of media stuff. But you know, producers are generally very, very happy with the market. We're in there. They're kind of excited, but they're still proceeding with caution. Is my way of interpreting it. You know, we certainly didn't see any heifer retention last year. And you know, what, wait and see what happens this year? I think they're ready. I think they're thinking about it. I think they're getting closer to doing it. But it's been a slow process to get there to get their expectations to a point where they really wanted to jump off and do that in a big way.

[Yeager]  Well, let's look at it this way. What was your headline of that cattle inventory report?

[Peel]  Well, you know, no big surprises. I mean, the report actually came in pretty close to expectations. So, you know, we've gotten smaller over the last year coming into this year, small enough that in many cases, we're setting, you know, decades long comparisons now on some of these inventory categories. Um, you know, the only surprise if there will, if you will, in the report was really some of the revisions that USDA made the last year's numbers, specifically the replacement effort category. Those were big revisions. But you know, that happens as more information comes in. So again, not a surprise that we would get revisions. But this, the the size of the revisions was a little bit bigger than you would normally expect.

[Yeager]  A year ago, at this time, when we talked, the story was I still categorize it as a weather story. Now, again, when he talks about revisions, has that revised how we talk about the 22 story, and looking at it and 23. And now here in early 24?

[Peel]  I don't think it really does. I mean, we go back, and it basically says that we were, you know, getting tighter and faster than we realized. And then the data said, but in some ways, you know, I suppose a little bit bigger perspective audit is that maybe the revisions kind of confirm what we sort of felt like was happening. And, you know, again, sometimes there is a little ketchup on the data to, you know, when things are changing fast. Sometimes the data takes a little while to catch up.

[Yeager]  I guess I've never asked this, but do you know the makings of how revisions happen? I mean, is it different than what happens in grains?

[Peel]  I don't know that I know the details. So I wouldn't want to speculate on that. You know, in terms of exactly how that happens, I don't I'm not really sure, relative to how their sampling frame changes or whatever. So yeah. 

[Yeager]  I was just curious that you just brought it up. Like, you know what I've never asked, I should ask somebody.

[Peel]  Yeah. Well, I could and I go ask in more detail. I just never have. 

[Yeager]  I may have to do that. I mean, because we always hear about it in green reports. And in our market analysts, you know, they come on and they like well, you know, we revise this and, and it happens with say unemployment. I mean, those revisions happen. They say, we moved this month and the gross domestic product, there's revisions there. So I guess in a way, it's everybody trying to just get things right Yeah,

[Peel]  I think so piano there. Yeah. Again, it's a it's a statistical process. And, you know, sometimes you, you just get additional information that you need to go back and kind of reset the the boundaries here and then and then make your new comparisons. 

[Yeager] I was looking at a chart before we started talking and its you know, it's a weapon flow but it the biggest thing is it still keeps trending smaller and smaller. Have we hit peak cattle inventory in the United States?

[Peel]  We hit the peak inventory in the mid 1970s? You know, if you look at that chart, we peaked all time records for cattle inventory for the beef cow herd, whatever, in the mid 1970s. And then, you know, we got smaller for a lot smaller or smaller fairly quickly, I should say, for about 15 years after that. And since then, I you know, in my mind, we've been trying to kind of stabilize, we're still cyclical, so we still have ups and downs in the numbers. But you know, as a trend, I think the industry kind of reached what could be a stable site size. But we've had a hard time we've had two decades in a row where drought has emphasized the lows, taking in this lower than we needed to be and wanted to be. And, and so, you know, it's been a challenge to sort of maintain that stability. You know, going forward. Now, I, you know, I still think we, I don't think we got too big in this last cattle cycle, with around 32 million beef cows. I Eat In fact, when we first sort of peaked out, I described it as a plateau because the economics, I thought it was going to be a very sideways kind of a movement, maybe a slight liquidation. And that's sort of what happened from 2019 to 2020. And then by the time we got into 2021, we were starting to see some drought issues take a hold certainly 22 and 23. were driven by the drought. So we had a fairly pronounced liquidation. So it, you know, sort of the timing kind of fit in with the cattle cycle, but really exaggerated it to the downside, and this time has taken us lower even than 10 years ago.

[Yeager]  Yeah, you look at the dips in that same 10 chart. Yeah, it is 2013 and 1989. I mean, yes, it all lines up with those big drought cycles that we've had. So is it only weather that lowers our herd size? Is that still the biggest factor?

[Peel]  I think weather is the primary reason why we got this low. Again, I don't think we intended to get this low. I don't think the economics would have taken us this low from the 2019 peak. But having gotten there now, I think there's a number of factors at play, one of which is still continuing weather issues and potential weather issues. But I think there's some other factors at play. Now that will have a lot to do with how fast we rebuild, probably more than anything. I don't think there's a question that we will rebuild at some point. I don't think there's much of a question that we will rebuild, you know, back to significant levels. I've heard a few people say, Well, we're just never going to go back. I don't think that's true. I think this industry has plenty of market potential to be again, I don't think we got too big in 2019. So I think, you know, I think that's, that's still a reasonable target. somewhere in that neighborhood. But the process we're gonna get there, this time was going to be a lot different than what happened from 2014 to 2019.

[Yeager]  In what way,

[Peel]  The difference even though it was both drought driven, so it was drought, it took us low and 20. To the low in 2014. Drought has taken us now to what may be the low, it's not clear it is the low yet. But the drought in 2011, 12. And 13 was very, very severe, but in a specific region, primarily Oklahoma and Texas, and immediately surrounding areas. Lots of the rest of the industry kind of continued with business as usual, through that time period. And one of the things that came out of that was that we maintained and actually started building a bit of a heifer pipeline before we started herd expansion in 2014. This time, we have not done that, because the drought has been much more widespread. It's moved around to different regions. It's affected so many more producers over the last two to three years. We have continued to liquidate females. So we're in a much bigger hole now. In terms of where we start from to try to rebuild. It's going to be a much slower process. I think it's going to take significantly longer even once we decide we want to do it and it's not clear that producers are quite there yet. But I think they're getting there. I really expect that unless weather jumps up is a big factor again here in 2024. I think producers are probably ready to start that process, but it's inevitably going to be a slower process.

[Yeager]  Well, you answered my question ahead of me even asking this next one about regions, because I was curious. Again, last year, we talked about your region, Oklahoma, Texas, dry right now where I'm at dry, but we're not near the cattle producing area that you are. So when you say it's more widespread, that is interesting to me, because it then makes it seem like, either it's super pronounced everywhere and really bad in the areas that could get impacted the most. Or is it just a, there's just so many numbers, the math has to work out that that reduction is smaller because of the weather issue in a wider area?

[Peel]  Yeah, you know, if you look at the drought, I mean, it really started in 2020. And that, you know, the first year, the drought was really kind of southern rocky mountains of Southern part of Colorado, Utah, Arizona, and they were severely impacted. Colorado had a big decrease in beef cow numbers that year, but they're not big enough to really change the national numbers. So I didn't show up so much till 2021. And the drought was much worse in the northern plains. So it was primarily the Dakotas, eastern Montana, and Wyoming. And then it sort of moved out of that area. And they improved quite a bit by 2022 moves farther south, into the central and southern plains in 2022. In 2023, it got worse down in Texas, again, Oklahoma actually had a pretty good year in 2023. But we were kind of an island in a sea of drought in 2023. And Kansas continued, and still continues to have great areas. It got worse in Missouri, in 2023. And then late in the year, of course, well, it moved back up into the Midwest somewhat, but it also moved into the Delta and Gulf Gulf Coast region. Recently, they've gotten a lot of rain. So I think, you know, they've gotten some improvement. But the point is, everybody's kind of had their turn in the grinder here. And they've been forced to do some things, make some tough decisions, and and incurred a lot of both sort of physical pain in terms of the herd and the resource issues, as well as the financial issues that go along with trying to survive a drought. And so I think it's been a much more broad base kind of an impact cumulatively over these last three years or so.

[Yeager]  Or let's play conspiracy theorist we have fewer feeders, fewer operations who are bigger, therefore maybe a little more flexible, and how they can shift from one state to another. And weather a storm, is that a possibility?

[Peel]  I don't think that's much of the story. You know, as we've moved tighter, we've managed to hold feedlot inventories, high kind of against gravity, we've sort of been defying gravity for about the last three years. And we've done that, you know, with a couple of ways. The biggest one, of course, is that we continue to place a lot of heifers and keep feedlot inventory feedlots. Obviously, our volume based businesses that were run that feed mill, packers are volume businesses, they need to run as close to capacity as they can. Both of them are trying to manage costs more than anything. And, and, you know, again, we've been able to do it, the drought kind of aided and abetted that process by forcing, in many cases, people to market feeder cattle sooner rather than later. So they got into the feedlot a little quicker, we pull cattle forward a little bit. And so in some cases, we pull them in at someone lighter weights, which means they can stay in the feedlot a lot longer. And so you know, feedlots need to be full feeding cattle, but it doesn't matter whether they're turning them over very fast. And so and in fact, what we've continued to see is the days on feed, on average have gone up, the turnover rates have gone down. So we're not necessarily producing more beef. And that was certainly true beginning in 2023. But it's you know, it's the night it's the dynamics of how those inventories play out. Now, I say all that to say that you can chase that thing as far as you know it for a while, but at some point in time you run out of runway. And I think we're you know, it's been slower to come down than I thought but I really think in the next few months, we will see these feedlot inventories tighten up dramatically because we just just don't have the cattle the feeder supply really reflects that now. And of course, the clincher will be when we do start retaining heifers. Then we won't be placing them in the feedlots. And so a tight down supply is going to get severely tight for a couple of year period when we start retaining heifers to try to expand the herd heard and we haven't really gotten into that yet. 

[Yeager]  But it's coming one side of the ledger that mill can get some cheaper corn right now. Yeah, can that complicate matters?

[Peel]  Well, you know, it's as we go forward and be able to back up just a little bit 2023 was a pretty good year for cattle feeders, because we got to record high fed cattle prices, frankly, faster than I expected. I'm not sure why the fed cattle kind of lead feeder cattle in that process, but they did. And so feedlots, you know, really had pretty good returns, because they got to sell sort of record fed cattle prices at 2022 feeder cattle prices for the most part. And even though cost the game was high, they did pretty well, going forward, they are going to get some breaks on cost, again, that will help in certainly will provide them with more incentive to, to try to find things to feed, but the numbers are going to get tighter, they're going to have a hard time finding numbers of feeder cattle of any kind. And they're going to be very, very expensive when they do find them. So I think they're going to face a lot more challenges with their margins going forward. Like all of the margin industries above the cow calf level.

[Yeager]  I've been avoiding this word for the majority of the conversation, I only had one word written down. And that was bubble. Are you concerned at all for those folks that you've just talked about that? They're the ones who have bought the feeder, they bought that animal at the high?

[Peel]  Well, no, they haven't bought it at the high. Because we're nowhere near the highs yet. Again, you know, if you look at the high prices we had in 2014, and 15, those high prices led by calves and feeder cattle, as happens in this kind of a situation. But those happened a year to a year and a half into herd expansion. Again, that's the product of a tight supply getting a lot tighter when you start pulling heifers out of the feeder cattle mix. And it's so that's all ahead of us yet, we've gotten to nearly record high prices, just in anticipation of that. So you know where we are now is not is not the peak that we saw in 2014, it's about a third of the way up the left shoulder of that thing. And so, you know, we've got a long ways to go here. But all of that said, you know, in this kind of a market. Again, everybody the markets focus right now is on the cow calf sector, we need more cows, we've liquidated too far, relative to the markets potential, the markets trying to provide incentives. So it's going to raise those calf prices, and then the whole constellation of feeder cattle up through fed cattle and so on, goes up. But the input side of those margin operations above the cow calf level, were gonna go up faster, and probably proportionately more than the output price is. And so every one of those margin operations in general is going to feel a squeeze. And that's going to become much more apparent for the feedlots. And return of cattle for the next two plus years is going to be increasingly challenging for them. Because the replacement costs, the incoming cost, once they sell cattle out it's going to look pretty daunting, I think as we go forward, and the numbers won't be good. So they won't be operating anywhere close to capacity. And they're going to have some cost efficiencies that go along with that.

[Yeager]  Yeah, is there a size of producer that's more susceptible? In that cycle that you just talked about?

[Peel]  Well, I'm not sure. You know, the big guys need the most cattle. And they're the ones that that got that way because of cost efficiencies. So you know, in some sense, when the numbers aren't there, they can potentially be the first ones to sort of feel the pain. Now that said, small guys may not have the easy advantage to fine gamble, they're probably operating in a little different market space, if you will, a little bit smaller circle. So I don't know that I don't know that it's going to make a lot of different, like, everybody's gonna face a lot of challenges maybe in slightly different ways.

[Yeager]  What about the consumer? Because at what point does that consumer look at the meat counter and go, ah, something else?

[Peel]  Well, you know, what beef is already at record levels. There's a ton of pork and poultry out there and consumers aren't turning to it. And as long as that's true, now, it could change. But, you know, we've been through a lot the last couple of years, we've continued to watch demand, and I will continue to watch it concerned about that potential, but we just don't see any indication that that fundamentally consumer demand is weakening at all. And you know, you know, as well as I do, you go to any steakhouse in town on Thursday night, and you're going to wait in line for an hour. And so it still continues to look pretty good at that point. Now we're producing less beef. Beef production had an all time peak in 2022 as a result of liquidation. So that It's a non sustainable way to peak out beef production because we were eating inventory, you can't do that consistently. And so 2023, we started to see beef production all dropped about 4.6% or something like that, and 2023 We're looking for another 5% Decrease in 2024. And another decrease yet of some magnitude and 2025 at least. So all of that said, we're, you know, consumers are, some consumers are not going to eat as much beef, because there isn't going to be as much beef. And so, you know, that's what, that's what's that some people are gonna see that and say, well, that means demand is fading. In an economy's world, that's not a loss of demand, that's, that's a change in the quantity available, right. And in the process, when supplies get tighter, the market generally rations a smaller supply with higher prices. And that's what I expect to happen. So, you know, I think we'll see higher, somewhat higher. Now, again, I said earlier, that at every level of the market all the way to the consumer level, prices won't go up as fast or proportionately as much as the layers below them. So you know, I think everybody and that means that ultimately, probably retailers will feel some squeeze, I suspect that retail prices, they will go higher, but I don't think they'll go higher proportionally, as much as probably box beef will at some point. box beef won't go up as much as fed cattle do. So packers will get squeezed, they're already getting squeezed. So you know, we'll, everybody's gonna get a piece of this squeeze going forward. But the end result is that there's going to be less beef, and it's going to cost more for the foreseeable future.

[Yeager]  Okay, give me the packer story in this you did just kind of, you know, their margins were good than they weren't. What do you see them? Here in 24? You did kind of just gloss it quick?

[Peel]  Well, yeah. Yeah, same story, really, they're a margin operation, they're a volume based business, they're going to have trouble with both of those things going forward, the supplies aren't there. And, and, and again, fed cattle prices are going to squeeze them relatively more, even though box beef will will adjust, it will go up at some point. But you know, the dynamics of those supply changes take time to work through the market. And so I think the Packers, you know, to the extent that I have a little interaction with them, they know what's coming, they're prepared for it, they don't like it, but they can't do anything about it. And they're prepared to kind of hunker down and do the best they can for the next two plus years.

[Yeager]  At some point when the consumer has to pay, or it's believed that someone's making way more money than they should Congress gets involved, or you're an elected official, where where do you anticipate they might sniff around this cycle?

[Peel]  Um, well, I suppose if there's going to be some of that I tried to stay out of politics, I can't figure out cattle markets live on politics. But, but But you know, if they, I mean, there is that tendency, if it happens, this time, it'll probably happen in that consumer space, I would suspect as much as anywhere, there's going to be there's going to be some wailing and gnashing of teeth over continued high prices and limited limited supplies, not that we're going to run out. In fact, one of the keys to not running out of beef and having actual disruptions in supplies and supply changes to allow prices to adjust. That's what markets do more than anything is make sure we don't run out of stuff. And if we let the market work, it will take care of that. When we yield to the temptation to start messing with it. That's when I you know, I get nervous that we're going to actually create some additional problems in the marketplace.

[Yeager]  Yeah, you and me both get concerned about that. And yes, no, I'm not I'm not trying to get you to dip into politics. But you know, we both know what we're talking about here. I mean, it just happened, someone we still haven't had a resolution from the last investigation of cycles, no action. You couldn't get beef state producers from both parties together, even in their own party couldn't get together. So I don't have a lot of faith that anything's gonna come there. And I think what you just said is, like so many things, the market will work itself out,

[Peel]  you know, the beef industry, collectively, all of the things we've talked about these multiple layers, the time dynamics, the this geographic dispersion of this industry, I have argued for years and years, I believe I truly believe that the US cattle and beef industry is the most complex set of markets on the planet. And I've always challenged people come up with another industry any anywhere that's more complex, and I haven't had anybody really, you know, come up with a better example. And I say all that to say that there's so many moving parts in this industry. And we rely on so many markets at so many different levels, that if you start messing with one of them, or a couple of them at a given level, the the unintended consequences across the entire industry are just unfathomable. Because you really can't anticipate what all is connected to what all else, I mean, it's just enormously complex. And so, you know, markets do a remarkable job. When you think about the fact that you can walk into any grocery store in the country, any day of the year, and there's fresh meat in there, that's probably not more than two or three weeks from having been processed. But the process that started building the supply for that piece of meat to be there started two and a half years ago. It's absolutely amazing. Any of it works. And it speaks to the power of the marketplace to you know, to coordinate a tremendous amount of diverse actors and, and situations and market levels, and keep it all flowing. I think it's actually quite remarkable what happens when you look at that.

[Yeager]  And that's why I always appreciate you being able to boil it down for simpletons like myself, that's always great, Darrell. Okay. But I'm going to ask you to do one more simpleton thing here at the end a year from now, when we're talking. Do you anticipate I think earlier you said there's we're looking at a two to three year cycle on one thing a couple of months on here, six months in there, I guess let's let's just base Oh, boil it down to three things, what are we looking at for inventory a year from now?

[Peel]  You know, the very best that I could see happening, and that's assuming weather's not a continuing negative factor. And that we even have an interest or producer expectations that want to try to start some sort of expansion, the very best that I can come up with, with the numbers we have to work with today, as we would be lucky to hold it stable this year. You know, if you look at the again, these heifer inventories, you know that USDA just came out with the replacement, the beef replacement heifer numbers, are the lowest since 1950. And they revised last year's numbers. So these last two January, based on the revision a year ago, and this one, we've had two years now of heifer of less than 5 million beef replacement heifers in the country. And that's not happened since 1950. And if you look at so you know, when you think about changes in the cow herd, we're going to slaughter some cows, but the question is how many beef cow slaughter would have to drop 20% or more year over year, given the number of replacement heifers we have available right now, just to hold it steady. I think that'll be that'll be a best case scenario for 2024 would be to not liquidate much more. And I honestly think there's a good chance we will liquidate a little bit more, again, assuming whether it's not even added into that equation. And then but we might set the stage in 2024, to begin rebuilding that heifer pipeline, so that we could put together at least a limited level of herd expansion, maybe in 2025, even then I don't think it's going to be that fast. I think it's going to take another year beyond that if we start this year, and we don't have any disruptions.

[Yeager]  And if somebody doesn't cash out, when they look at a price, and someone says it's time for you to be done.

[Peel] that happens to you know, yeah, that comes up a lot. I get that question about ag producers and all that. And I do think it's a big issue. I mean, obviously, there's a, you know, there's the age demographics of the industry would suggest that we're going to see a fair amount of transition logically, in this kind of a market environment, some of those guys are going to take advantage of that opportunity. And all of that's very important for them. And maybe it's important in a sort of demographics as for the industry, from a market standpoint, I'm not sure it changes things a great deal. Most of the time, most of those resources those guys are using are going to stay in the industry. And they're going to stay in production. So maybe we're changing the name on the mailbox. But I don't think for the most part that those pastures are going to go away. Now sometimes they do but in the total scheme of things, I think those resources probably stay in the industry. So maybe the transition adds a little more lag time in getting this thing going with new ownership, new plans, new expectations, but but I think the resources will be there and I think we'll continue to, you know, respond to the market as best we can. Going forward.

[Yeager]  We'll see how it all shakes out. Always appreciate your insight. Thank you so very much. Good to see you.

[Peel]  Good to visit with you.

[Yeager]  My thanks to Derrell, for his insight on the market. Recently, at the end of the Market to Market TV show, we asked you a question about some feedback. And I want to read one of the letters that we received about your favorite farm activity in winter and it's from our friend Lee in Iowa who says, Dear Paul, my favorite activity in winter is checking the photos on my trail cam. I position my trail cam on the creek bridge on my farm. It's like a window into the secret nightlife of the wild critters on my farm as they saunter, swim, or fly by the most common sightings are raccoons, pheasants, coyotes, but I see great blue heron, skunks, wood ducks, muskrats, and the white tailed deer in the summer. You can see in those photos, it's quite active. We thank you for being active with our program. Send me an email anytime MarkettoMarket@IowaPBS.org. New episodes come out each and every Tuesday. We'll talk to you next time. Thank you. Bye bye