My View From The Country

The Decision To Expand Isn’t As Simple As It Once Was

In the short term, I believe expansion will continue to disappoint the experts.

If you watched the latest Superior Video sale, you likely noted there were a significant number of calves being sold for fall delivery that were grossing $1,500/head. It isn’t uncommon to talk to sellers this year who are receiving $400/head or more on their calves than they garnered a year ago. And they were plenty excited and comfortable with the prices they received a year ago.

The conventional wisdom is that expansion will be in full swing this fall, as Mother Nature seems to be finally allowing for widespread expansion. However, there’s a whole new host of factors that economists now must plug into their models.

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First, there are the hard numbers that may limit or slow expansion. One is the sharply declining number of pasture acres, as pastureland continues to be diverted to farming and recreational use, or is usurped by urban encroachment. This is a reality that, like the increased risk and capital required for expansion today, has been discussed extensively.

The factors I wonder about are those we haven’t experienced in the past, which makes them more difficult to factor into the equation. Back in the old days, what we considered to be “good” profits encouraged expansion. In large part, this was because those profits were still minimal enough that expansion was required to enjoy an average American lifestyle. Our industry has never been faced with the decisions that producers will be making this fall.

With the market windfalls that are possible today, do you pay your bills and buy a new pickup? Do you cover the costs of your kids’ college educations? Or do you take that vacation you’ve been promising your bride for 20+ years? When your business must expand to provide for your family, expansion of your business, when given the opportunity, is a given. However, today’s prices make that that decision no longer solely a financial one, as an acceptable standard of living from a financial standpoint is being obtained for the first time without undergoing an expansion.

Are producers going to add 100 cows and invest $300,000 to do it? Or will they use that money to pay off debt, upgrade the tractor, and remodel the kitchen? I have seen this dynamic in other segments and businesses; when a business actually begins to provide excess cash, and that heightened level of income appears to be sustainable in the short term, it's just human nature to want to enjoy the fruits of one’s labors.

I think that’s particularly valid when today's costs of expansion and level of risk have moved to levels that used to be unthinkable. Expansion decisions are now competing with other business opportunities, from diversification to purchasing land, that weren’t part of the decision process in the past.

Yes, eventually economics always rule, and our industry will even begin to attract new capital and new players if these types of margins persist. However, in the short term, I believe expansion will continue to disappoint, and confound, the experts.

 

 

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Discuss this Blog Entry 3

Jay O'Brien (not verified)
on Jul 11, 2014

From someone who usually writes insightful articles, this one surprises me. Questioning whether people will pay today's market to buy cows is questioning whether it is the market. If 100 cows are costing $300,000, that means that someone is paying it. If producers weren't expanding and paying it, the market would be enough less to entice them to do so. Heifers are being bred, the feedlot placements show this. If you don't believe the feedlot placements, look at the comparison of replacement quality heifers and their steer brothers or run of the mill heifers of the same weight. There is demand for replacements.

Marshall is right that pasture availability will limit expansion. Increased numbers of cows in feedlots will offset some of this, but pasture availability is the true limit. Rains have started a healing process, but there is a lot of recovery yet to happen. Other than that, economics is working and expansion will happen.

James McGrann (not verified)
on Jul 17, 2014

If you calculate the return in assets (ROA) it will tell you that its difficult to bid land and capital away from alternatives to expand the cow-herd. As suggested its going to take a long period of historical high cattle prices to attract capital to turn around the decline in the cow herd.

Phil A. (not verified)
on Jul 17, 2014

Troy,

Good thoughts, we have been growing in our cow/calf operation at 3-5%/yr for quite a while now. Got feet under us cows have not exactlly been paying themsleves the whole time but glad we are where we are at today.

You make a very interesting point on 2 fronts for me to grow at say 20% or more at once I have to totally change my way of thinking and operating. I could not find the grass to add that many cows in a single year. Secondly if I could just how interested would I be in buying 3K bred heifers? This will only be the second fall where my calves averaged over 1,000 per head. Means I need 3 yrs of calves to just get my money back.

This cowboy will be staying the course growing slowly at same rate as in past. Right now is not the time for us to do something dramatically different that what has got us to this point over the past 8-10 years.

Market takes all types to make the market however and I fully respect the operations who can turn on the switch and grow much faster than I can.

Phil A.

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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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