Zimmerman gives tips on economic viability going into next cattle cycle

CattleFax’s Lance Zimmerman offered insight on whether today’s beef producers are taking the right steps to survive changes in the beef industry.

Zimmerman is a research data and analysis manager who oversees the member database as well as coordinating the organization’s fundamental research and analysis for the cattle and competing protein markets. Zimmerman co-hosted a segment during the Stockmanship and Stewardship virtual event Nov. 11 and 12.

Stockmanship and Stewardship is a unique two-day educational experience featuring low-stress cattle handling demonstrations, Beef Quality Assurance educational sessions, and facility design sessions.

Raising cattle is a way of life, Zimmerman said, and, from a stewardship perspective, he wants producers to make sure their operations are sustainable for the next generation.

“A key part of the market outlook is really managing risk, managing marketing opportunities, and then understanding where the markets are going and arming yourself with information so that your operations can weather those storms,” Zimmerman said. “And more importantly probably take advantage of opportunities so this operation continues to last for multiple generations to come.”

Pay attention to the cycle

It’s likely the cattle cycle is chief on everyone’s mind. Zimmerman looked back on where the industry has been, and where the signs are pointing it toward today.

“One of the biggest things that I think we can benefit from is understanding how these cattle cycles tend to go,” he said.

When he first started at CattleFax 10 years ago, he heard the cattle cycle was broken.

“We went through this typical cycle where we go through highs and lows—the lows and the highs were always 10 years apart, and it was just pretty darn dependable all the way through the 50s, 60s, 70s, 80s and 90s, even the early 2000s,” he said. All that changed early 2010. When the market soared, cattlemen missed the dip.

Zimmerman, however, doesn’t believe the cattle cycle is broken. There have been many changes though.

“We have record high corn prices leading to massive liquidation across the protein segments,” he said. “Then fueled by massive expansion across all the protein segments as grain prices cheapen and a drought released its stranglehold on the industry—that really was a long term drought that lasted 20 years.”

Mother Nature’s influence

Looking at conditions now, it’s in what Zimmerman calls a “20-year wet cycle.” Every year, on average, is going to have the traditional droughts—or ebbs and flows of moisture.

“But we’re still going to have that ebb and flow,” he said. “We’re still going to have a market that’s going to react to weather in price and profitability.”

Going forward, Zimmerman sees another 20-year cycle where Mother Nature will still have an influence, but “hopefully with each year, a little bit less influence than what we’ve been accustomed,” he said.

Cycles are fueled by expansion and contraction, and price peaks and valleys most often correspond in almost an opposite reaction to what the inventory has done.

“Obviously the most recent lows are fresh in our mind, from an inventory perspective, and we dip that cowherd down below 29 million head on a U.S. average basis,” Zimmerman said. “Since that time we’ve built this herd back up.”

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There are about 6.5 million more cattle to start this year than at cycle lows. There’s 3 million more beef cows, more than 2 million feeder cattle and calves and more than 1.5 million cattle in feedyards across the country. There have been improvements, but there have also been challenges.

“Cyclical price risk is still a factor,” Zimmerman said.

Most cattle producers benefitted immensely from the market at its highs—record highs that hadn’t been seen before.

2020’s challenges

He believes the lows have been tested as we’ve gone through 2020, and he doesn’t believe those will be tested again any time soon. Of course, COVID throws a wrench in things if there’s a plant slow down or another challenge to production.

He hopes for more revenue opportunities, but beef producers must manage everything—costs, marketing, risk management plans—so that they’re able to capture that opportunity as it comes over the next five years.

“One of the things that I think we can gain confidence in is the supplies are going to continually and gradually work lower,” he said. “We peaked the cowherd back in January of 2019.”

The harsh winter weather events of 2019 took a toll on many cows, along with some negative price responses and volatility during that year.

“We’re going to continue to see aggressive culling in 2020 and introduce a smaller cow herd by about 300,000 head again in 2021,” Zimmerman said. “After that, the declines will be much more gradual.”

Zimmerman hopes beef producers will start to prepare for and anticipate market prices as the supply bottoms out in 2024 or 2025. In addition, the calf crop will be smaller as there’s likely to be fewer cows to produce calves.

“It’s going to work ourselves into tighter supplies, and better market opportunities,” Zimmerman said. “Production likely will be at it’s high this next year.”

Optimism for 2021

Zimmerman and his colleagues believe the lows will probably end in 2020—thanks in part to COVID backing up the supply chain and slowing production.

“The best thing we can do as cattle producers is not react to those high prices by buying a bunch of expensive females. Hopefully we lean our way closer into expansion as Mother Nature allows.”

As far as looking at the prospects for expansion five years down the road, as crazy as it sounds, according to Zimmerman, there is still the possibility of expansion.

“You’re sitting there saying what’s going on with these crazy CattleFax guys?” he said. “We just went through two of the most challenging years we probably ever went through as an industry, and these crazy fools are talking about expansion.”

Zimmerman said cattle producers should not get caught up in the emotion of the day. They should be treating their operations as a business.

“I think we all recognize that emotions have been pretty high across the industry,” he said. “When people are feeling optimistic, you start hearing chatter in the coffee shop of ‘Man, I feel great about this investment, excellent time to be in the cattle business.’”

Then when things start to turn sometimes indicators point to desperation, panic or even depression.

Striving for perspective

When beef producers faced years like 2013 to 2015 where they thought it couldn’t possibly get any better, it’s hard to think about the bad times coming back.

“That’s when you have to have your radar up and be looking for opportunities to capture everything the markets trying to give you at that time,” Zimmerman said. “Because we’re at the point of maximum financial risk.”

What is a realistic profit though? Stringing together a bunch of consistent homeruns while minimizing strikeouts isn’t realistic for a long period of time. Beef producers need to be rigid in their planning, even though they may not want to.

“We want to be adaptable to change,” he said. “What we need to recognize is we have that discipline to make business decisions on sound information.”

That adaptability comes from having cash reserves and equity on the side to survive, no matter what the markets say.

And the markets say there’s certainly a premium today relative to the cash market, but that’s largely due to COVID.

“We’ve seen a lot more discounts,” he said. “I would tell you, in our opinion, we believe the futures markets are going through a period of transition.”

Zimmerman does think when the “dark cloud of COVID that’s been looming over us” clears out there will be some opportunity on the horizon. In the later months of 2020, cow-calf margins have been largely. Other segments of the industry haven’t been as fortunate.

“Stocker operators—we’ve had some loss years, and we had some expensive calf prices,” he said. “Massive breaks in the feeder cattle, feedyard or margin operators. The packers have been wildly profitable.”

Zimmerman briefly touched on the relationship of packer margins, cattle numbers and meat inventories. Going through 2010, there was a “massive cowherd contraction.” Later drought handed a terrible hand and more cattle were culled. Weekday slaughter and fed steer and heifer numbers continued to erode, thus the packing capacity went down.

“As a result, the packing industry lost money left and right,” he said. Leading to plants being shut down completely.

Mother Nature allowed a rebuild in 2014 to 2016—to around 525,000 head slaughter capacity. But once it was to that point, the capacity didn’t exist.

“We became boom and bust,” he said. “From a margin standpoint, we went from a situation where capacity far exceeded the cow herd, to now the cowherd’s potential far exceeded capacity.”

Zimmerman is encouraged by the number of beef producers involved in discussions as an industry on how to make sure the mistakes made in the last 10 years don’t have an opportunity to happen again.

“We don’t strangle the margins away from the packing industry, and in turn five years later, they strangle the profits away from the cattlemen,” he said.

Zimmerman said that based on their estimates, if the cowherd gets back to around 30 million, the slaughter capacity on the fed cattle basis needs to maintain 485,000 head. If the cowherd goes back to 32 million head, there needs to be an additional 40,000 head a week capacity, “I would tell you 1,000 a day.”

“Be talking about that. Let’s get to a place where all of us can find success,” he said. “If we all combine profitability, we’re a better industry. We work more efficiently when we work together and all of us can share in the prosperity.”

Kylene Scott can be reached at 620-227-1804 or [email protected].