Softer beef prices add to ‘sting’ for dairies


Issue Date: January 6, 2016
By Ching Lee
San Joaquin County dairy farmer Rien Doornenbal, with his dog Rusty, poses with a Holstein-Angus calf that he will sell into the beef market. He breeds 10 percent of his Holstein herd to Angus to take advantage of the higher values of that market, but with the drop in beef prices in recent months, dairies sending cull cows and calves to market now earn less income as they continue to struggle with lower milk prices.
Photo/Ching Lee
San Joaquin County dairy farmer Rien Doornenbal, right, talks with employee Adolfo Sandoval as he moves a Holstein-Angus calf that is part of the dairy’s breeding program.
Photo/Ching Lee

The sharp drop in beef prices may be a disappointment to ranchers who have enjoyed several years of robust prices, and the weakening cattle market also has hurt dairy farmers whose cows and bulls are now worth less money, especially as they continue to struggle with low milk prices.

Dairy farmers earn extra income selling their cull cows and bull calves. Compared to earlier last year, cull-cow values have shrunk by 30 percent to 40 percent, while day-old bull calves that once fetched $500 a head are now worth $70, said Tulare County dairy farmer Frank Mendonsa.

"It's already a hard time to be in the dairy business in California," he said. "Now with the softening of the beef prices, it's going to sting even worse."

Strong cattle prices for a good part of 2015 helped provide cash flow for some California dairies in light of sagging milk prices, said San Joaquin County dairy farmer Rien Doornenbal. Producers did not expect the unprecedented high beef prices to stay at those levels, he said, but the rapid drop in the market also "took everybody by surprise."

"The entire beef cattle industry didn't see this coming this fast," he said. "The feedlots didn't see this coming this fast."

The surge in the cattle market in recent years had been driven largely by steep declines in the nation's cattle inventory, the lowest in more than 60 years. The situation was made worse by the 2012 drought in Texas and across the Midwest that parched pastures, drove up feed costs and forced ranchers to drastically cull their herds. But the down cycle appears to have finally turned the corner, with the U.S. herd expansion well underway.

Lower feed costs have allowed ranchers to retain more heifers. The strong dollar also has reduced beef exports, adding to the domestic supply, while high beef prices have led some U.S. consumers to switch to other proteins, dampening beef demand.

When beef prices were at record highs a year ago, Mendonsa said dairy farmers were not necessarily just sending their older cows to market but also looking to sell their heavier cows in order to capture more value.

With cattle prices falling, Kings County dairy farmer Theo de Haan said he won't be culling his herd as heavily as he had been. He raises all of his own replacement heifers and markets extra animals. For a while, those replacements were bringing him "a pretty hefty price," allowing him to ride out the downturn in milk prices, he noted.

"That was another tool in our tool chest," he said. "It made a difference and kept our head above water when things got tight."

The drastic change in beef prices means dairy farmers will have less incentive to turn over their cows, said Sacramento County dairy farmer Fred Denier, noting that he will now raise fewer replacements and hang on to his cows longer. This could further temper the state's milk production in the long run, he added, as older cows are less efficient. But the biggest impact to dairies will be on their bottom line, he said.

"Lower beef prices are going to affect overall income," Denier said. "That, along with lower milk prices, will mean most dairies are going to be working in the red now."

Even though feed costs have moderated, he said, those reductions have not been enough to offset the depressed milk prices dairy farmers are earning. For this reason, California milk production will continue its downward trend, he said, noting that it had been dropping even when cull-cow prices were substantially higher.

Another concern, Mendonsa said, is how tumbling beef prices could affect a dairy's standing with its lender. When beef prices were higher, he said, banks tended to be "more at ease," because there was more value in the dairy herd. Now that prices are down, there's more pressure on dairies, particularly those that are financially challenged, he added.

"I think the bank is going to be a little more conservative when they loan money out with the beef prices being lower," Mendonsa said.

Doornenbal said he expects cull-cow prices will begin to "recover somewhat" starting this month, though he doesn't think they will reach the levels of nine months ago. He noted cull-cow prices typically are at their lowest during the last two months of the year, because that's when cattle ranchers throughout the country sell their beef cows that haven't gotten pregnant, causing a greater supply in the market.

In addition, feedlots that take steers for fattening also were holding on to those animals longer when cattle prices began to slip, with the hope that the market would improve. When those animals finally reached the market during the last two to four months, the carcass weight of those cattle was much higher, Doornenbal said.

"That's been adding more supply to the market, too," he said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.