2021 was a rollercoaster ride for the cattle industry. The industry experienced many ups and downs throughout 2018, from unpredictable prices to fighting propositions that could have a devastating impact on producers.
Todd Wilkinson, a South Dakota cow-calf and feed operation owner, has firsthand experience with these issues. As the vice president of National Cattlemen’s Beef Association (NCBA), Wilkinson has also heard from producers across the country about their struggles.
Wilkinson, the owner of Wilkinson Livestock, says that his biggest challenge has been the unpredictable prices of live cattle. He can cash out anywhere from $112 per hundredweight to $139 per 100weight. When deciding how many cattle to buy, rising feed costs made it difficult to calculate an efficient rate of return. Producers were also stuck at the same price range in 2021, which lasted months.
Don Close, Rabo’s senior animal protein analyst says this year was good both for grocers and packers in terms of price. According to the Bureau of Labor Statistics prices for grocery store beef rose by 20.1% between October 2020-2021. Yet, producers didn’t see a bump until the second half of the year.
Normal year cattle prices rise in April, fall in summer, and then rise again in winter. The first quarter of this year saw high market prices, but a price plateau between May and October, rather than a spike or drop.
“It’s been frustrating for producers, because they saw record-high retail prices for beef and record-high packer margins, but they weren’t able to get their slice of the pie,” says Close. “However, the price levels for the second half of this year have been incredibly strong.”
Close reports that feedlot cattle have seen a $20 increase in price over the past eight week. Close’s average estimate for live cattle in the past year is $121 per one hundredweight.
“Market conditions have improved considerably in the last two months,” says Wilkinson. “We are looking at some pretty favorable economic estimates on the rate of return for our cattle.”
An Atypical Production Year
This year’s drought also caused many producers to shuffle their buying and selling rotations. Wilkinson usually purchases cattle to be put in the feedlot between May and June. That lot sat empty because there was uncertainty about feed.
“We would typically be marketing fat cattle in December, January, and February,” says Wilkinson. “We didn’t fill our facility because we were worried about being able to find corn at a reasonable price to feed the animals. Now, we have no cattle to market.”
Wilkinson was one of many producers who had to cancel a cycle. However, this brief retraction gave them some leverage with meat packers. Farmers were able negotiate better and asked for a higher premium. Wilkinson is also optimistic regarding negotiations with packing facilities over the next 2 to 3 years. He plans on expanding his herd to 8,000 by then.
“Going forward, I think we’ll see some additional packing capacity come online,” says Wilkinson. “That’s going to be helpful for the industry because the contraction in shackle space over the last 10 years in particular puts you at a competitive disadvantage when you negotiate the sale of your cattle. With the contraction in cow herds and new plants coming online, I have to believe a feedlot operator will be in a better position to get a good rate of return on his business.”
Due to a contracted national herd and fewer calves to sell, Close expects next year’s market to be counterseasonal, with fourth-quarter prices much higher than in the first quarter.
“Heading into this counterseasonal year, my biggest worry is that while we could be looking at phenomenal cattle prices, certainly higher than anything we’ve had in the last five to seven years, cattle feeders are really not going to make a lot of money because feed costs are still so high,” Close says.
Cattle Industry on the Hill
Like many producers, as Wilkinson ages, he’s looking to transition his operation – both the land and the cattle – to his son and daughters. The Biden administration proposed changes in several sections of the federal tax code to help pay for the American Families Plan, which could have had a significant impact on farm families.
To fund Biden’s roughly $1.8 trillion plan, tax provisions on the chopping block included stepped-up basis and like-kind exchange. Stepped-up basis allows a beneficiary to use the market value of the assets at the time of benefactor’s death. An exchange of like-kind assets allows one asset to go and another one to go. This avoids a capital gain tax liability. Both are vital tools for ranchers and farmers when planning to transfer their business to the next generation.
NCBA rejected exemptions for family-owned farms and ranches. The unique structure of these businesses and their transfer circumstances meant that exemptions would not work. NCBA was not content to accept exemptions. They knew that the only way to guarantee certainty for current and future farmers, ranchers, and ranchers was to preserve federal tax policy. This allows for a stable business climate.
“If I can’t pass my farm down to the next generation without them paying significant taxes, it would put a small operation like ours completely out of business,” Wilkinson says. “Hopefully, we can get rid of this proposal for good.”
Members of Congress introduced legislation after Biden announced his plan. This included significant restrictions to the stepped up basis and a decrease on the exemption from estate tax (Death Tax).
The NCBA successfully fought against these House measures. Negotiations are continuing on the Senate bill. The association states that it will continue fighting for key tax provisions.
“A proposal like this could have a disastrous impact on cattle producers in a time when, as an industry, we are transitioning or expecting a transition in about 40% of operations to the next generation within the next 15 years,” says Ethan Lane, NCBA’S vice president of government affairs. “Our work on this proposal really culminated into one of the largest grassroots campaigns this industry has ever launched.”
The 2021 wins have set the scene for 2022 to become a competitive year. Those victories have also given Wilkinson a reason to be more optimistic about the future of the industry – a feeling he hasn’t had for several years.
“Farming is so capital-intensive for a young producer to get involved in,” Wilkinson says. “If he can see a positive economic return forecast, it’s a little easier for him to make it his life’s work.”
Source: Successful Farming
