My View From The Country

The Bearish Math On The Beef Industry Doesn’t Add Up

Table of Contents:

Profitability in the beef industry is influenced by many factors, but none more so than the number of consumer dollars coming into it for our products.

The beautiful thing about economics is that it is still part art and not all science. Look hard enough and you can always find an economist to support your view. In fact, a lot of economic reports are created to justify a market position or view, rather than to accurately forecast or explain the market. Still, there’s always a lot to be learned from these economists.

When I worked at CattleFax, there were certain people who were must-reads and I learned a lot from them. However, you always had to keep in mind the paradigm through which the individual was looking at the world. Some are almost always bearish, others almost universally bullish.

It’s been a very difficult recently to be a dyed-in-the-wool bear regarding the industry. Eventually, they’ll be right again, but it’s been a difficult run of late. Conversely, the bulls look brilliant today. That doesn’t mean that the bears are wavering, however; in fact, they’re getting more vocal.

The crutch of the bears’ argument is something like this – the higher prices we’ve enjoyed the last 18 months are great but unsustainable. They contend that for the long-term health of the industry, prices must and should decline.

What doesn’t add up for me is the claim that consumers can’t afford, or are unwilling to pay for, our product at current demand levels. Nonetheless, beef demand actually grew this year, while pork and poultry have faced a harder time.

The bears point to the declining number of cows, fewer producers and lower per-capita consumption, and lament a contracting industry. They claim that the key to building the industry back is to lower prices.

 

First of all, per-capita consumption tells a lot of stories, but it’s not an indicator of demand. Domestic per-capita consumption is simply production minus exports, divided by the number of people. While per-capita consumption is negatively influenced by population growth and growth of exports, that’s not necessarily a bad thing from an industry or producer viewpoint.

Supply is the other big factor driving the consumption number. As my ex-boss used to say about beef consumption, “They’ll eat whatever we produce (they don’t throw it in the ocean); the only question is at what price will they consume it.”  

Discuss this Blog Entry 11

on Mar 7, 2014

Sorry……but this statement is WRONG………just wrong…..

"From a biologic efficiency standpoint, the data is clear that there is very little difference in biological efficiency between today’s 1,000-lb. cows and 1,500-lb. cows."

Anonymous (not verified)
on Mar 11, 2014

Sorry..this statement is backed up by historic SPA data. Todays larger cows, on the average, aren't producing bigger weaning weights.

on Mar 12, 2014

Actually, the statement is 100% accurate. The data from MARC and Miles City data is published, reviewed and pretty straight forward. It is important to remember that mature size and maintenance requirements are not a 1:1 relationship. The converse of that is that production increases with mature size is not a 1:1 relationship either. The general rule of thumb is to raise mature size to the .7 power. Amazingly, production increases to at roughly the .7 power relative to mature size as well. I know that the scientists will argue that this relationship is not valid, it is true that maintenance costs are in part shaped by surface area. It is true that an elephant has lower maintenance requirements relative to its size than a mouse for example. However, the advantages of the larger cow are marginal within the normal weight ranges that we currently see. Certainly, we are talking about biological efficiency up to the ranch gate, as we move further down the production chain, cow maintenance requirements decrease in value, so there will be advantages to larger cows, more growth as you move down the production chain. I'm not claiming their is no difference in biological efficiency as you take a more systems oriented approach.

It is so obvious that it is probably redundant to say, but biological efficiency and economic efficiency while related are not the same trait. Biological efficiency I was referring to was at the cow/calf level. Input requirements versus output at the cow/calf level.

Certainly biological and economic efficiency is affected by the target compositional endpoint. For example we can take an animal that compositionally should be slaughtered at 1200 lbs, and make them weigh 1400 lbs, but the efficiency of that last 200 lbs declines dramatically. Efficiency varies depending on the stage on a growth curve.

We also know that other things influence maintenance requirements. Milk production is one of those factors, as levels of milk production increases maintenance requirements increase as well. Milk production is a highly inefficient way of putting gain on a calf, this too becomes decidedly more inefficient when you take a look at it from a total systems approach. Another factor is internal organ mass, as it increases maintenance requirements also increase.

Of course biological efficiency is not the whole story, cows must also be matched to their environment. That constraint will never change.

We also know that their is tremendous variation in feed efficiency within similar mature sizes based on genetics. We are making tremendous progress in this area, and have seen what pork and poultry have been able to do based on selecting for improved feed efficiency. It is exciting to see the differences in feed efficiency across constant metabolic weights and the relatively high heritability estimates. So certainly, there is variation among those factors. We have also been very successful in selecting for rapid early growth, or bending the growth curve, while not increasing mature size. In our herd the relationship between growth and mature size is inversely related that is pretty exciting considering the genetic relationship that we know exists between mature size and growth.

I realize that economic efficiency is ultimately more important than biological efficiency. And it is true that economic efficiency changes based on the target and on prices. In today's world with current prices it heavily favors pounds, but that has not always been the case. It is not about margins as much as net profits and the marginal rates of returns have certainly shifted. I do not believe that it will always be this favorable. Also we know that the marketplace is very inefficient in assigning value. That too is changing greatly, economic efficiency has been distorted because of our inefficient marketing system. Historically a 5 weight calf has been worth roughly the same even if the end points and ultimate value are drastically different. As information exchange and value determination becomes less segmented and more accurate we will no longer see these value differences slide through the system. And economic efficiency will become easier to measure and assess.

In graduate school we modeled 100's of years of production based on varying levels of mature size and milk production, and for varying market schemes. Not surprisingly, moderation and balance ended up being the most profitable most of the time. In extremely tough environments the little cow with low milk was the most efficient, in very good feed environments larger cows with more milk were the most efficient. The ideal level of milk production was not only determined by feed resources but also by marketing strategy. Milk became less valuable the longer cattle were retained.

The most exciting thing is that we no longer have to choose between growth and mature size. SPA and other data sets show that the most profitable operations spend more money on genetics and that they have more growth relative to mature size. In fact, weaning and post weaning growth no longer necessarily mean larger mature size. Conversely, we have larger mature size females with limited growth. We also know that certain lines of smaller mature size cattle are highly inefficient.

It is an exciting time to be in the cattle business. We have the tools to select for fertility, efficiency, and rapid early growth without increasing mature size that we never thought we would have.

The data on biological efficiency however is not up for debate.

on Mar 12, 2014

Please reference the Miles City data on biological efficiency. The difference across the weight ranges within the weights we typically see were not different. Certainly a little cow, in high quality feed environments does not work, and a large cow in a very tough feed environment does not work. However, those are differences that reflect matching a cow to its environment, and not biological efficiency.

Anonymous (not verified)
on Mar 10, 2014

As a feeder I can make more money per animal on a 700lb calf that that I can put 750-800lbs of gain on vs. a 500lb calf that I can only put 500-600lbs of gain on.

Southwind (not verified)
on Mar 10, 2014

Remember at a symposium one time, and old cattle feeder/rancher said "The ideal cow has a brother that's a sorry feedlot steer"

W.E. (not verified)
on Mar 11, 2014

Grazing cattle the right way actually builds topsoil. Growing corn doesn't. Hidden costs of present systems of food production are uncounted here. Conventional corn fertilizers, for example, burn up organic matter faster than the plants can replenish it. Ask the researchers at the University of Illinois who concluded that "the net effect of synthetic nitrogen use is to reduce soil’s organic matter content." If we continue to allow our young country's topsoil to be mined away, our descendents will curse our generation. As for your statement that U.S. grassfed beef can't compete: Our small herd produces enough high quality beef each year to feed at least 250 people in 100 local families, along with healthy seedstock, all without a speck of grain other than some crop residues in fields that border our pastures. Yes, grass finishing takes longer than putting the calves through a feedlot would, but the myriad expenses saved and the fertility gained on our land certainly compensate. Today, over 80% of arable American land grows annual crops. To make our land sustainably productive, the plants that are the ultimate sources of food for us and for our livestock should be 80% perennial, 20% annual. No one needs to starve to allow mankind to do that. We just need to allow our paradigm to evolve to encompass a more permanent and locally-oriented form of agriculture, with each farm's production and management tailored to best protect, conserve and enrich its specific place on Earth. And we’ll also need to allow a few more young people to enter the fields of animal husbandry and farming, which would help take care of the unemployment problem as well. Unfortunately most are being trained to play games of one kind or another instead of learning the skills required to become capable food producers.

Anonymous (not verified)
on Mar 11, 2014

I hope your operation continues to grow and prosper. I think you can do that without disparaging other
production methods.
No doubt you can find many "scientists" that will tell you you cannot sustain rotaional crop production, but I can take you to several operations that are proving that to be untrue.
My personal opinion is that a mix of crop rotation and livestock grazing a rotation is the best. But, I'm not going to tell you that you are all wet, even if I'm pretty sure your operation could not exist, long term, in our area with the land prices and rents we are experiencing.
Point is, we have to seriously look at produciong enough food for about 9 billion people by 2050 and that cannot be done if we use stricktly grazing animals or grain production. And it can't be done with out the use of modern technology. You are wrong. There would be a lot of people who would starve. Read Norman Borlaug.

W.E. (not verified)
on Mar 13, 2014

Read Abraham Lincoln, who said, "The greatest fine art of the future will be the making of a comfortable living from a small piece of land." Although most folks certainly aren't there yet, it can be done. The most productive spot on our farm is a very small area--a little over 1000 square feet but smaller than our house--which now grows three peach trees, three apple trees, a patch of bramble berries, eight blueberry bushes, a pear tree, an asparagus patch, and some strawberries. Nearby are couple of pecan trees. In the past, it was a chicken yard, so has stored-up fertility from many previous generations of chickens. It would produce an enormous amount of high-quality food every year even without having any seeds planted. But it also grows some peas, salad greens, tomatoes and a few other vegetables each year. It's fertility is renewed annually with compost made from kitchen scraps, leaves and other recycled stuff. Most suburban yards in our area could be equally productive, but too many are just being mowed. We grow grain and cattle on larger acreages. Where the cattle winter, better crops grow the next year. Nature's abundance is diverse. Observing and mimicking nature is the way to renew land and feed more people sustainably. 21st century farms will need more diversity and more husbandry, with less of the 20th century petroleum-dependent mono-crop mentality. Borlaug's work during the "Green Revolution" certainly allowed humanity to overpopulate the world, and it seemed great at the time. In retrospect, the "Green Revolution" must also be held responsible for over-feeding the world while under-nourishing humanity with foods that are higher yielding but lower in protein, higher in starch, and less nutrient dense. According to Dr. William Davis, Americans currently have "wheat belly" from consuming far too many low-protein wheat products. Our food needs to be better quality, not just higher in quantity.

Anonymous (not verified)
on Mar 12, 2014

It might be interesting to compare frost free days and annual precipitation in areas where various patterns of beef production are ongoing.

Here, in western SD, we can generally count on last frost being first week in June, first fall frost in September. Annual precipitation as about 14 inches, fortunately mostly as rain and in our brief growing season.

For this ranch, relying on native grass pastures, planted when returning old fields from Homesteading days to grass. has worked for over 120 years, but we are pretty limited in cow numbers, needing about 25 acres or more, per cow for a year.

Frank Schlichting (not verified)
on Apr 8, 2014

What analysts are missing is that cattle ranching is not like other businesses. Not everyone in the cow calf sector is motivated solely by profit. Most people who have a cow calf operation could make more money if they sold the operation and invested the proceeds. Ranching is as much about lifestyle as it is motivated by profit. Many producers will stay in the cattle business as long as their health allows regardless of profitability.

Having said that there is however a big difference in staying in an industry with marginal profits and entering a business with poor prospects for making money. Nobody in their right mind would borrow the kind of money needed to start even a medium sized cattle ranch and have enough money left to put food on the table.

The only way to make a small fortune in the ranching business is to start off with a large fortune!

I don't care what the experts predict I doubt if there will ever be a large rebuilding of the cattle numbers in North America no matter what the price of cattle is.........the numbers just dont add up. The risk isn't worth the reward to get into the industry.

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What's My View From The Country?

As a fulltime rancher, opinion contribur Troy Marshall brings a unique perspective on how consumer and political trends affect livestock production.

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Troy Marshall

Troy Marshall is a multi-generational rancher who grew up in Wheatland, WY, and obtained an Equine Science/Animal Science degree from Colorado State University where he competed on both the livestock...

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