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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.
Industry size is driven by three primary factors – profitability, efficiency, and external drivers like weather or government interference in the marketplace. Of course, cow numbers aren’t a great indicator of demand, as fewer producers are today producing with millions of fewer cows as much beef as they did decades ago. Increases in efficiency have led to more production per cow, and the ability for one operation to run more cows has contributed to decreasing numbers of cows and producers.
Of course, events like prolonged drought, BSE, ethanol and, perhaps country-of-origin labeling, have impacted the economics of the business enough that the industry downsized to adjust to the new economic realities. Some of these impacts are reversible, however. For instance, we’ve essentially erased much of the export losses we experienced as a result of BSE.
However, we haven’t seen a major shift in demand in reaction to higher prices. That means that according to supply, which is driven by profitability, we will move up and down the demand line in relation to our production levels. If production increases at a rate exceeding the growth in population or exports, then prices will move downward; if production doesn’t keep pace with those factors, prices will move up.
The key is profitability. If we’re making significant returns, the herd will expand; if we’re losing money, it will contract. Some of the bears point to declining per-capita consumption as an indication that consumers are rejecting our product. In actuality, it simply reflects declining supply, past profitability, expected profitability and weather constraints.
While it’s incorrect to use per-capita consumption as a demand indicator, these folks still have hit the crux of the argument – if we are to grow the industry, we must increase profitability. In the short term, the feeding and packing sectors have subsidized the cow-calf sector, as they’ve attempted to purchase future supply by increasing cow-calf profitability. Ultimately, however, industry profitability must be measured across all segments and viewed from a total systems approach. Profitability is influenced by many factors, but none more so than the number of dollars coming into our industry.
Higher fuel and land values, and higher grain and forage costs driven by global demand for grains as both fuel, feed and food have led to a dramatic increase in overall production costs; that’s something no economist disputes. We can increase profits by increasing value, or lowering costs.
Part of the contraction in our industry has been driven by these two factors, but that’s where the math becomes real fuzzy. As a seedstock producer, this gets a little tricky for me because we’ve always emphasized moderate milk and mature size, and highly feed-efficient cattle. Our environment puts certain restraints on production that producers can’t ignore, so we’re big-time advocates of matching cows to the environment.
With that said, we have to be intellectually honest and admit that cow size is about matching production to resources and risk management, more so than there being some magical size that is more profitable or biologically efficient. I understand that economic efficiency and biologic efficiency are not always the same trait, either, but the math is neither that complicated nor as simple as some try to make it.
While I’m known to be in the “small cow” camp, it concerns me when there seems to be almost universal acceptance in some circles that small cows are better. 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. In fact, today’s market signals would likely favor the larger cows from an economic efficiency standpoint, but those factors can and do change. Certainly, that can change dramatically whether you take a silo approach and only analyze profitability at the cow-calf level, or analyze profitability from a total systems approach, which ultimately is the final arbitrator.