Cattle surge in production, demand flashes economic story ahead - Derrell Peel

Paul Yeager  Hi everybody, I'm Paul Yeager, this is the M to M Show podcast, a production of Iowa PBS and the Market to Market TV show. You know, there's never a shortage when it comes to the livestock industry and the last couple of years, if you go back to 2020, that's not even where the story started, there was a trend developing in 2019, that we are still dealing with a recent report by USDA laid out how animals are moving and disappearing, not necessarily one of those mysterious conspiracy things, but they're headed to the market. And we've been eating them. There's been a strong demand for beef and what does that mean long term? What are the factors that are playing into you going to the grocery store, and having a selection of fresh food? We're gonna talk about that and the economics of how that got there. But also the struggles that those in the middle that do the feeding for input costs. And we're also going to discuss those decisions at the feedlot or the cow calf level, about turning that bowl out and seeing what's happened Derrell Peel, who better than Oklahoma State University Extension, agribusiness and agri-economy, discussion. That's what we're going to have today with Derrell, always a good chat, always a good time. And very insightful here. As we get into the dynamics. Especially, you know, me, I can't escape the weather. And that's going to be a big part of today's discussion. So here we go. We're going to school Ag Economics with Derrell Peel. Alright, Derrell, we were just before we started rolling, I was asking you about the weather. What is it with Oklahoma and ice that strikes fear in everyone?

Derrell Peel You know, this state, I grew up in Montana. And and so you know, dealing with snow and winter weather was not a big deal. But honestly, the ice that tends to happen down here is much worse than anything you could have up north. It's so much more debilitating, plus, we don't get a lot of winter weather. So we're really not equipped to handle it. I think it's a combination of those two things. But but you know, you really can't do anything when you lay down that glare ice. Yeah, it just brings everything to a halt. And normally it doesn't stay cold for very long. So that's the difference between Oklahoma and Montana from a cattle perspective is you know, up there, you learn how to deal with it, you got to work in it, your feet in it, you got to be out in it down here, you typically just hunker down and wait it out and 24-36 hours, it's gone most of the time. But when it doesn't do that, and then it's really a problem for our guys. And so those are going to challenge

Paul Yeager  Those animals have a little thicker coats up in Montana than they do in Oklahoma. 

Derrell Peel  Yeah, they do. They get used to it. And so that's that can also really be an issue, especially if we get early season storms and our cattle are not held up yet. And so they can really they can really suffer a lot in this.

Paul Yeager  You mentioned Montana is your home. How did you end? What did you grow up in doing? Was that always been cattle? Or were you one of those guys that you had different visions as a kid?

Derrell Peel No, you know, and I shouldn't say I you know, I actually started out life in West Texas. But my dad wanted out of row crop farming, he wanted to raise some cattle. So when I was a little type, we moved to western Montana and he bought a little place and we raised cattle and hay basically and and he worked off the farm some too. And so that's what I grew up. I was always around cattle my whole life and and I've been interested in it. So that's been my whole my whole life as well as my whole professional career has been has been the cattle. I've been in Oklahoma now. 35 years, almost 34 I guess. So I've been here a long time. But it's always been about cattle.

Paul Yeager  Do you think the rest of the country has caught up to the fact that Oklahoma does is more of a cattle state than Texas? Come on? Let's throw some shade at Texas right here. 

Derrell Peel Well, it is a big cattle state. And you know, in some ways I have made the argument in the past that proportional to our size. The cattle industry is very important here. The stocker cattle part of that industry is particularly important. You know, one of the things I've done in my career is work a lot with the stocker industry. And it's been unique because when I left Montana, I didn't know what the stocker industry was. And I think there's still some challenge. You know, most cattle up north are born in the spring, they leave in the fall and they go somewhere. But we don't necessarily know where always and, you know, you just don't do a lot of that because there's just too much winter and so. So I had to learn about the stocker industry when I first moved back to the Southern Plains, and and it's been a lot of fun, really learning the role of that and the importance of that. And then of course here in the southern plains, most years we have wheat pasture in the wintertime. That's a fairly unique thing. And it actually plays a pretty important role nationwide in cattle markets because we provide a home for a lot of cattle from the southeast or from maybe from up north. We're at that time of the year when there isn't a lot of things to graze.

Paul Yeager  Well and I had heard last, late last summer, that there was concern that Oklahoma was going to be a little different place for cattle because of the dry conditions and maybe not as many cattle were going to maybe some cattle were coming from Texas. But there were going to be some offloading farther east where there was rain, did that end up happening?

Derrell Peel  Yeah, absolutely. In fact, you know, we just got the USDA semi annual cattle inventory numbers. And, and the impact of the drought is very evident in there, in terms of what we expected, not only on a nationwide basis, but regionally, Oklahoma, actually, if you look at the all cattle and calves inventory, Oklahoma had the biggest reduction year over year of any state. So we'd lost something like 600,000, head of cattle last year in total, which was I think, twice what Texas lost and so. So the impacts here in Oklahoma have been very, very, you know, very severe, and continue to be, frankly, because we're still in the drought. And right now we're having a lot of cold weather we have like everywhere else in the country, we have limited hay stocks. So we got a lot of guys that are still trying to figure out how they're going to get through the winter, let alone what spring conditions are going to look like.

Paul Yeager  Do you think it's a temporary reduction? That maybe some of these cattle did go somewhere else? And we'll come back? Or is this a sign of yes, there has been liquidation of herds?

Derrell Peel Well, we've clearly liquidated the herd. In fact, if you look again, at the USDA numbers nationwide, we lost over a million head of cows last year, which is the biggest in terms of absolute numbers, the biggest year over year decrease in the beef cow herd since like 1986. So, you know, and one of the things about this drought this time has been that it's been much more widespread across the country. So you know, we had a drought 10 years ago, that was very severe in Texas and Oklahoma, but outside of that region, not so much. And there were a lot of capital, in addition to the ones that were net liquidated, there were a lot of cattle that were relocated to New homes during that time period. This time, I don't think we've had as much relocation because there just weren't a lot of places that had a lot better conditions, frankly. And so. So there's been you know, capsule otter was enormous last year, that, in fact, the last two years, as well as heifer slaughter. And so the the level of female liquidation across the country, and in particular, in these in these drought regions has been very, very significant, and will impact us for, you know, several years as we go forward.

Paul Yeager  Well, you just gave me the facts give me the impact, then.

Derrell Peel Well, the impacts are, you know, sort of twofold. One is 2022 was all time record beef production in the US. And when you look at the cyclical nature of cattle inventories, you know, cow herd and the all cattle inventory peaked in 2019, we've been getting smaller, how did we have beef production that many years later? Well, the reason we had peak all time record beef production in 2022, is because we were eating those that inventory. That's a temporary thing that you can do or have to do when you're in the middle of drought forced liquidation. But it's not sustainable. Obviously, that's not a that's not an ongoing proposition. And the other, so that's the, you know, that's sort of where we are now, going forward, we have a lot less cattle. And so beef production is going to fall, that's going to impact the consumers in ways that they have not seen thus far in this thing. And then of course, at some point in time, we trust that the drought conditions will improve, we don't know when that's going to be it hasn't happened yet. But when they do, then we're going to try to rebuild. And that's when we're going to really squeeze beef production, because we're going to need to not eat all those heifers and cows, we're going to save them to rebuild the herd. And that that is the kind of thing that really puts a spike in cattle prices for some period of time. We don't know when that's going to happen, but it will happen at some point. Because

Paul Yeager  it's going to be extremely tempting for a producer to see the price and when the the yard calls and says hey, we're going to offer this for a price to not load up a load and send them to market. But for the good and health of the organization, or for the industry long term. You gotta keep some of those animals back. Right. That's it right. Am I is that to oversimplifying it?

Derrell Peel No, well, no, I think that is exactly you know, the the dilemma, if you will, and it's the nature of the cattle industry that makes it kind of unique even compared to other livestock markets is that you know, it's a one for one proposition. In order to invest in future production, you got to not eat that heifer. Now you got to not send her to the feedlot and feed her out. And you know, it's not like the swine and just Free where you can save one guilt. And a year later, you get 20 pigs. In the case of the beef industry, you say, one heifer, and two years later, you get one calf. So it's a much slower process to. And it kind of exaggerates those times when we have too much or not enough is that you, you know, you, you're either eating your way out of excess inventory, or you're making a tight supply even tighter. And so yeah, that's what's ahead for us here at some point is that we're going to, we're going to make this thing a lot tighter. And the market prices are going to are going to reflect that and in terms of providing the incentives that producers will need to do want to save those heifers and invest in that future production.

Paul Yeager  But it gets down to dollars and cents in one way, Derrell, is that when you have a six in front of that corn market, that price, that makes it pretty expensive to feed. And then you're going to have a consumer who's going to look at the price up on the board of their their butcher or their meat producing god, that's not a number I'm going to afford or buy.

Derrell Peel That's right. You know, it's going to be really interesting to see how this thing plays out cattle prices. You know, from a consumer demand standpoint, beef demand has stayed remarkably strong through this whole pandemic thing, all the disruptions that we've had, and through the fact that we've had large supplies of beef, so prices have stayed high, which says that beef demand has been strong. But now we're talking about when there's less beef, we're going to tighten supply, then those prices are going to be at least there's going to be pressure to push them higher. And the question is, how much can they go higher? And maybe the question is going to be how will consumers, some consumers probably will get priced out of the market, there won't be as much beef and markets ration things to make sure we don't run out. So we're going to find out who wants it the most and and will price it accordingly. But that's but that's a very difficult issue right now, given the consumers are facing so much inflationary pressures, on on everything. So that's one end of it, that's going to be kind of the cap on the upper end. The bottom end is we've got this really tight supply scenario developing here. So what it means is the guys in the middle you mentioned the price of corn, all of the margin operations above the cow calf level are going to be really squeezed in this process. Because the the you know, the the top side of the market will adjust at least somewhat, but it won't adjust fast as fast as the bottom side is coming up. And so I think cattle feeding is going to be a dilemma going forward here, because we're going to have not as many feeder cattle, they're going to be really expensive. And then we've still got a high cost of gain in terms of high feed prices. And so those margins are going to be a challenge going forward.

Paul Yeager  And the problem is the middle is where a lot of beginning producers kind of enter the game. And that's always the producer you worry about on a possible contraction or dramatic price swings. They're the ones who can't quite weather it, their pencil isn't as long as someone else.

Derrell Peel Yeah, that's right. You know, it's a, you know, it's a question of who's going to make these adjustments? That's a question in terms of the type of producer. There's some regional implications. When you think about, you know, you think about high cost of production and how high did these prices have to go again, to provide the incentive to rebuild, that's got to come out of the cow calf sector, that's the factory, of course, that the all the supply comes from. But when you think about where cattle are produced, they're produced all over the country cows are, because we wherever there's forage, right, but in the eastern half of the country, that tends to be where we have, you know, these introduced grasses that require fertilizer and lots of inputs relative to the west where we have rangelands that don't require near as many inputs. So we may see some regional differences in how the industry responds going forward, and sort of who can respond or who can respond at least the quickest in all of this process.

Paul Yeager  I've never thought of this until right now, but you're speaking you make it sound like I'm watching an election night coverage. When when we talk about Bellwether counties, you know, there's election prognosticators that say, well, in tema County, this has happened, which means the election is going to go this way. Are there Bellwether counties for you that you look at when you study all the things you've just been talking about to give you an indication of what may transpire in the market on any level?

Derrell Peel Yeah, you know, I think I mean, part of it is just sort of where cattle production tends to take place. And so if you think about where the cows are, they are produced all over the country and there's some very important cattle production in lots of regions. But obviously, the bulk of the cows are in the middle of the country, right. So from Texas to North Dakota. You got about 40% of the beef cow herd. And so you're gonna watch those, those counties just because there's so those those states, I should say, just because they're so big and what's happening, and of course, that's where the droughts laying the worst right now across Nebraska, Kansas, Oklahoma and parts of Texas. And so what happens there is really going to dictate what happens in the rest of the country from the standpoint of that fundamental supply. From a cow calf standpoint, then the you know, once you take it up to the feedlot level, you obviously we got to watch, you know, the feed side of the market, as well as the cattle side, the feeder cattle side of the market. And so you know that that shifted a little bit, one of the things that came out of this latest cattle inventory number. You know, for many years, most of the time, Texas has been the largest cattle feeding state in terms of numbers on January one, although, you know, about 10-15 years ago, when the sort of ethanol thing took off, there was a period of time where Nebraska was, was a little bigger than Texas again. And then it's kind of shifted back to Texas. But I noticed in these numbers that Nebraska and Texas were actually tied on January one for all cattle. So there are those regional impacts in terms of of where cattle are going to be produced and where the resources are, and maybe how those resources are going to get used in the future.

Paul Yeager  And I think of the conversation I had with a producer in Kansas yesterday, who talked to a friend who's in western Kansas, who just said, we have planted, they have planted my friend, wheat on wheat that's not grown, they I have two years of two crops of seeds sitting in dry dirt, so there's no hope for them on a winter crop for this year coming. And when you talk about spread over an entire region, when you hear stories of, well, we can't even grow anything that will be used in three months from now, does that give you pause for concern?

Derrell Peel Yeah, absolutely. You know, again, when you look at it, especially seasonally, again, the southern plains and the wheat pasture grazing thing that's kind of unique to this region. Normally, our numbers in Oklahoma where I mentioned earlier, were way down. And if you do that estimated feeder supply calculation, which would capture those cattle that are out on pasture someplace or whatever our feeder supply, estimated for the state of Oklahoma was down 18 and a half percent, I think we don't have we didn't have much of a wheat, pasture grazing, we've got a few cattle in the southern part of the state, there's a little bit of wheat pasture, but way less than normal in the northern half of the state. And that's gonna go up into Kansas as well in the region where they would typically graze. And so yeah, so that, again, that has an impact not only on those states, but it also impacts the rest of the country, because we provide a home for those cattle, we, you know, we as we measure, we know that cattle flow in here from other states and, and those states some of them have have learned over the years that that what what our conditions are is going to have an impact on their markets. And that's certainly been true.

Paul Yeager  Is there anybody that wins with this report from from yesterday? And when I say when is it a consumer? Is it a feed? Or is it a cow calf? Who, who has the best outlook in '23?

Derrell Peel You know, in terms of prices, it's pretty clear that the cow calf sector is going to be in the driver's seat, because we're, you know, this report confirms that we're, you know, we're smaller than we need to be as an industry, there's a market that's bigger than what we can actually serve us right now. And we're not sure that we're done liquidating yet. So it may get even more dramatic. And so that means that the the markets focus is going to is going to go back to the cow calf sector to encourage that increase in production that we're that we need. And that comes from rebuilding the herd first, so that you can increase beef production. So the cow calf sector from a price standpoint, now if you're in the middle of a drought, and you had to get rid of your cows, that doesn't help in the short run, right. So it kind of depends on which cow calf producer you are and where you are in the country. But but as a sector, the cow calf sector is clearly going to be in the driver's seat from from that standpoint, as I mentioned earlier, the margin sectors are going to struggle, I think the feedlot sector is going to have some real challenges, packers are going to have a lot of challenges. You know, we've talked a lot in the last few years about Packers have had opportunities to make a lot of money. And that happens sometimes in that sector, they're gonna give a bunch of it back in the next two years

Paul Yeager  And they already have, we already saw a big reversal in about six, eight months, right, huge margins.

Derrell Peel Their margins were down and they're gonna get a lot tighter even going forward. And then ultimately, this tight supply and all of that is going to go to the consumer level. So you know, consumers are not going to get any relief. Again, there may be limits on how high we can push those retail prices, because of the challenges for consumers. But they're we're clearly going to push them as hard as we can. And I think the end result is that they will in fact go somewhat higher with with the implications that has for again for different consumers and who wants it the most who can afford it and what kinds of adjustments Will they make on the types of products maybe that they're that they're able or willing to buy in that environment?

Paul Yeager  Well, and let's, let's be honest, the consumer is in a kind of a pinch spot, when you keep hearing about hpapi, influencing the poultry market, and all of a sudden chicken hasn't dropped to a price. And that has gone expensive. So we went over to the beef market, because hamburger was cheap. And then oh, wait, now pork is there's there's a couple of factors and major sources of protein for the American consumer that are kind of hidden into that vise grip of sorts. Do you see any relief in any livestock industry that that might benefit more?

Derrell Peel From a consumer standpoint, you know, again, we're looking, in fact, if you look at the projections for 2023, for, you know, beef production dropping, pork production may be more stable, but it has been dropping somewhat poultry, also relatively stable, some impact on the meat side, but actually, the biggest impact in poultry from hpapi was on the eggs. And there's been a lot of talk about egg prices. And that's one of the protein sources that consumers can can turn to. So across the board, you know, projections for this year for total meat production in the US are for the first decrease that we will have seen in about seven or eight years. So we've generally seen increasing meat supplies. And now of course, we have to adjust that for trade and all of those sectors, the net flows of products in and out of the country. But the bottom line is we're going to see less meat total in the country. So I think, you know, I think your point is well taken that there's not necessarily going to be any any obvious alternative out there across the protein sectors, I think it's going to be a challenge and a bit of an issue for consumers.

Paul Yeager  When it shows up on the front page of the mainstream press. That's when we, it we because the eggs has been has been in there. And then there's the report of well, there really wasn't a supply demand issue that was just a profit taking opportunity by those companies. I won't I won't make you answer that question. But I will make you handsome. But I am going to make you answer this as we wind down just a little bit. As you look at livestock and and the consumer. It's been Is there a stomach for the non farm related person to see expansion of livestock, because you hear about people in ag states that don't want more confinement operations? So they don't want another feedlot or they don't want another beef processing facility? All these discussions have really reenergized in the last couple of years. Is there a stomach for the consumer to understand this more? And? And maybe realize, okay, yeah, I do need we do need more of x or y?

Derrell Peel Well, I you know, and I think that kind of gets to the point, we've, as a country, I think we've we've enjoyed abundant, relatively cheap food compared to most of the world for for a long, long time. And it's, it's, it's certainly easy in that environment to sort of take it for granted. And so then you start these kinds of conversations about the things that maybe we don't like, or whatever, without necessarily understanding the implication. So I guess I say all that to say that if we get into a situation where maybe food is either not as abundant, or not as cheap, then, you know, then the reality comes home that hey, we you know, there are some things that have to get done in order for us to have those, those advantages. And so, you know, I, there may be more of those conversations in the future, I think we're still in a good position to continue producing abundant, relatively cheap food for the American consumer. But it's certainly and you know, that the pandemic really demonstrated what happens when you seriously disrupt the supply chains and things. All of a sudden, whoa, you know, maybe at least temporarily, things weren't as available, or the range of products wasn't as available for a brief period of time. And that just highlights the fact that we can have problems where it becomes a much more fundamental question of, of eating rather than maybe some of these other questions that are, you know, a little bit, a little bit more philosophical in nature, if you will, or, you know, whatever. Not related to the the underlying issue of just making sure that we have lots of food for for everybody that needs it.

Paul Yeager  Politically, we're getting ready to work maybe on a new farm bill, we're not we think that's what's going to happen. You know, depends on what political source you read. But but on a policy sense, there's been beef States senators, I can think of Nebraska and Iowa, Kansas, have all been involved with the politics side before the farm bill about the packer margin. Really what prompted a lot of that and the fair market price and the the, the the understanding spot price and things like that didn't there's still going to be a stomach for that to move politically forward and any of those I mean, especially if the packer isn't going to be making money like they were?

Derrell Peel  Well, yeah, you know, I think there's a couple of things. One is, Hi cattle prices takes care of a lot of those discussions. And so we've seen this come and go, these issues are not new, we've been talking about them for as long as I've been in this business, at various times, they come and go. And so I think there'll be less of that just because we're going to be in an environment here for the next two to four years at least have relatively high cattle prices. And that takes care of some of that, but it won't go away either. Because, again, we've been here before, and it never completely goes away. You know? And, you know, I would just say that whatever we decide to do from a policy standpoint, by the way, I can't predict politics, I can't figure out cattle markets, let alone. So I don't I wouldn't attempt to predict what's going to happen. But But I guess, you know, here's where it comes down to, for me, I have argued for many years. And I really believe it's true that the US cattle and beef industry, as it operates today is probably the most complex set of markets on the planet. When you take all of the dimensions of complexity in this industry, I don't think there's another industry anywhere that can match it. And what that does to me then is it really highlights the fact that we need to let markets work. There's just too many pieces and moving parts, and too much too much dynamics in this thing. If we start interfering, any guy, any kind of government solution to a problem is going to inject into a market and disrupt the way markets work. And I really think we better be very careful about how we do that, if we're going to do that, and that's just that's my advice, I guess to the industry in general is be careful. If you if you if you think that's where the solution lies, because I think it's more complicated than maybe those simple easy to understand solutions with would let you think about

Paul Yeager  it not going to put a word in your mouth. But are you saying status quo?

Derrell Peel I'm I'm saying the market does a remarkable job. Yeah. If you think about the fact that any consumer in the country can go into a grocery store any day of the year, and find fresh meat, fresh beef, that's probably not more than two or three weeks from having been harvested. And yet the process that led to that fresh meat being available for that consumer started two and a half years ago, by some guy 1000 miles away, man many cases or more deciding to turn the bowl out. Now, when you think about all the things that happen from the time you turn in the pullout until you've got fresh meat available 365 days a year for consumers, I think you have to be really impressed that markets do a remarkably good job of making sure that we don't ever really have issues of walking into the store. And there's nothing there available for us today. And so I think markets do an awfully good job of solving a lot of issues along the way.

Paul Yeager  Never a dull moment and no shortage of things to talk about, Derrell. Boy, that's

Derrell Peel for sure.

Paul Yeager  Derrell, I appreciate the time. Thank you so very much for the conversation.

Derrell Peel Yeah, you bet. I've enjoyed it very much anytime I can help.

Paul Yeager  My thanks to Derrell Peele for his time and insight. New episodes of this podcast come out each and every Tuesday. You can find it wherever you get your podcasts or you can watch the YouTube version on our YouTube channel. Subscribe and follow today and always be in the know we'll see you next time.

contact: Paul.Yeager@IowaPBS.org