Steamboat Springs Ranchers in Northwest Colorado are making a profit when they sell feeder calves this fall -- as much as $200 per animal -- but that hasn't always been then case.
"Ranching is going to make money for people this fall," Colorado State University extension agent C.J. Mucklow said. As recently as three years ago, the high cost of hay meant some cattle growers were losing $100 every time they sold a calf.
Several factors have combined to reverse that trend, said Steve Koontz, an associate professor of agricultural and resource economics at CSU. First, there is very strong consumer demand for beef. Koontz attributed that demand in part to the fact that Americans eat half of their food away from home and are willing to pay a premium for a quality beef product. Americans also spend a relatively small percentage of their income on food, he said.
Strong demand for American beef overseas is also driving prices, Koontz said.
A ban on Canadian beef that went into effect in May had the equivalent effect of shutting down U.S. slaughterhouses for a full month, Koontz said. Finally, the beef market is in the phase of the commodity cycle where producers are enjoying very strong profits. The convergence of all of these trends is out of the ordinary, he said.
"This rarely happens," Koontz said. "It probably won't happen again in my lifetime."
At the same time, demand for beef is high, supply is low. That's because after two years of drought, Western beef producers began aggressively culling cows from their herds.
The primary investment a rancher has in a calf that's ready to be sent to a feedlot is the cost of the hay that sustained its mother through the previous winter, Mucklow said. Two tons of hay equates to as much as $200, or 70 to 80 percent of the investment in the calf. By shipping cows to slaughter even in a time of low prices, ranchers avoided that expense. The result of the heavy culling was a significant reduction in the supply of beef. When a single case of Mad Cow disease shut down the Canadian border, demand quickly began to outstrip supply. Previously, the U.S. imported 7 to 11 percent of its beef from Canada. Continuing drought in Australia also hammered the supply of beef on the Pacific Rim, driving prices even higher. South Korea and Japan began purchasing more beef from the United States.
Rod Sharp, a marketing specialist with the CSU Extension office in Grand Junction, said cattle prices and cattle herds usually go through cycles, but the wheel has been slow to turn this fall.
Ranchers not rebuilding
Farmers and ranchers would typically rebuild their herds by keeping more of their maturing female calves, called heifers. In some years, they might keep 25 percent of their heifers. But the cost of feeder calves this fall is strong motivation to ship the heifers along with the steers.
"We've been in liquidation for several years, and we're still in liquidation," Sharp said. "People keep more heifers when they're not as profitable. I'm telling people to work their herds hard and sell every calf they have now."
Larry Monger, who ranches on the lower Elk River with his wife Mary Kay, said the price for feeder calves is so favorable right now that some ranchers are rushing their animals to market.
"It's so unbelievable they're bringing their cattle ahead when they weigh 100 pounds less" than they typically would at sale time, Monger said.
The price of feeder calves has been pulled along by the price of fat cattle that are ready for slaughter, he said.
After a local rancher sells a calf, a feedlot will spend another year putting an additional 250 to 300 pounds on the animal at a cost of about 80 cents a pound. When the animal is 2 years old, it will weigh about 800 pounds, he said.
The next 300 pounds cost more to put on the animal -- about 90 cents a pound. A steer will be fed until it weighs about 1,100 pounds.
Monger said although hay appears plentiful in Northwest Colorado this fall, the drought still has a hold on nearby cattle growers in Eastern Colorado, Utah and Nevada. That fact contributes to the cautious approach local ranchers are taking to rebuilding their herds.
Sharp said the price of corn could ultimately be the factor that breaks the current trend and encourages ranchers to begin rebuilding their herds in earnest. If the cost of fattening cattle on corn increases, there will be less demand for feeder calves and it will again make more economic sense for ranchers to retain a higher percentage of their heifers.
The Mongers sold their calves earlier this summer when Superior Cattle brought its video livestock auction to town. In early July, their calves brought $1.05 a pound. He figures he could get almost $1.20 this month, but he has no regrets about locking in a good price.
"You can't look back and say, 'Look at how much money I might have left on the table,'" he said.
Grocery prices rising
Consumers also are seeing prices for beef rising at the grocery store, where a New York strip steak now costs between $7 and $7.60 a pound.
However, those prices don't fully reflect the 40 percent increase in the price of feeder cattle.
Consumers have only seen an 11 percent increase in price overall for beef at the grocery store.
The U.S. Department of Agriculture reported that in July, the average price for all cuts of beef hit a record high of $3.65. By August, the average price for beef at the supermarket was $3.73.
Simple math explains a portion of the discrepancy between percentage price increases that farmers receive and the price increases that consumers pay, Koontz said.
If the price a beef producer receives for a feeder calf goes up 25 cents, it may represent a 25 percent increase. However, by the time the steak arrives at retail, that 25 cents is a much smaller percentage of the finished product.
Another factor that consumers may not perceive is the literally thousands of products that can be derived from a single beef carcass, Koontz said.
Along with meat, the animal is used to produce leather, blood meal and glue, among many products.
Monger said he's cautiously optimistic that 2003 will mark the establishment of a new floor in cattle prices that could help ranchers be more profitable. Monger is a student of the intricacies of the cattle market, but he can also find an elemental way to explain the economics of raising beef.
"In 1972 when we got started, I had to sell 15 cattle to buy a pickup truck," he said.
"Now, I'm still selling $550 cattle, but it takes a lot more of them to buy a truck."