Summing up the state of the cattle business has never been easier: input costs are historically high and likely to climb higher, in a volatile manner that often defies logic.

Figuring a way to the other side has never been tougher: cow numbers are declining, the traditional cattle cycle is in hibernation and dog-eared rules of thumb no longer apply.

“Though costs are at extreme levels, that doesn't mean they're as high as they're going to get,” says Randy Blach, Cattle-Fax CEO. “None of us thought we'd see Minneapolis wheat selling on top of $20, but we have. None of us ever thought our economy could support oil prices at $120/barrel, but the market has marched right through it.”

So goes an historic period of relearning in the U.S. cattle business.

“We're all in a situation where cost of gain is approaching $1, and exceeding it in some cases. There are big premiums in the deferred live cattle futures, and I suspect these premiums will continue until the market sorts out this cost squeeze,” Blach says. “We've seen cow carrying costs increase $100/head on average during the past few years. I expect we'll see them increase another 10% this year.”

Salt in the wound comes with the fact that most of the increased cost has thus far been absorbed by producers.

“At some point, a portion of these added costs will have to be passed along to the consumer,” Blach says. In other words, he expects prices for fed cattle, and wholesale and retail beef to begin marching upward for the next couple of years.

Along the way, Blach adds, “Despite the higher costs, I think the market will continue to support calf and feeder-cattle prices higher than traditional thinking would suggest.”

There were 32.6 million beef cows in the Jan. 1 national inventory, 28.5% fewer than the peak in 1975 and the fewest since 1971 when the National Agricultural Statistics Service began providing the current inventory reports. According to Blach, the number of beef-cow operations with 100 or fewer cows has declined 17% in the past 15 years. The total number of cow-calf operations has declined 25% since 1986.

Yet, by most estimates, cattle-feeding capacity has been overbuilt by about 25% for at least 10 years. Meanwhile, for all practical purposes, beef cow numbers have languished for a decade.

“We (Cattle-Fax) don't see any beef cow herd expansion, nor will we for the next few years,” Blach says. In fact, he expects modest downsizing of the beef-cow inventory to continue for a few years. “I suspect we'll continue to rely more on increased cattle imports from Canada and Mexico since we're not growing the factory here,” he explains.

In April, the USDA Economic Research Service (ERS) estimated 2.65 million head of cattle would be imported to the U.S. this year, 6% more than last year.

Ultimately, that means further consolidation and concentration in the feedlot and packing sectors as they reduce capacity toward an economic equilibrium with domestic cattle numbers.

“We'll likely see more consolidation and concentration in the packing sector. We'll also likely see more cattle-feeding pens idled in the next 12-18 months,” Blach says. “When the dust settles, we'll have fewer, larger, better-capitalized operations than we've had in the past.”

A sustainability key

Fewer cow numbers and operations don't mean less beef, though.

“Beef-production levels will continue to be supported at close to all-time high levels because of increased productivity,” Blach says. “Beef-production levels won't fall dramatically here, though we may consume less of it here.”

He emphasizes producers need to understand that domestic beef consumption will decline over the next couple of years, but it doesn't mean demand is declining. Cattle-Fax estimates domestic beef consumption will decline 1.5 lbs./capita this year and potentially another 1.0-1.5 lbs. next year. That's partly because U.S. cow numbers will be stagnant to declining, but mostly because more production will be consumed outside the country.

Exports are a chief reason for Blach's optimism about the future of the business here, though he's concerned about the current economic squeeze.

“Only 4% of the world's population is in the U.S.,” Blach says. “There will be 1 billion new beef consumers around the world in the next decade.” Some of that's due to population growth, but most stems from the growing economic power of foreign consumers who find themselves with enough disposable income to contemplate making beef a diet staple for the first time in their lives. This at a time when world market prices for major food commodities such as grains and vegetable oils have risen more than 60% in two years, reaching historic highs, according to ERS.

Yep, it's the same global economic growth that's helped create the current dilemma in the cattle business here — global commodity demand has increased faster than supply. Given the U.S. dollar's weak value, U.S. grains have represented a bargain to global buyers.

Additionally, ERS analysts say short-term factors contributing to such steamy commodity-price inflation include: increased demand for biofuels feedstocks, adverse weather in some major grain- and oilseed-producing nations the past two years, and recent policies adopted by countries to mitigate food-price inflation.

For perspective, the entire U.S. population is currently 300 million. Global population grows by 78 million each year. There are 6.7 billion people today; by 2030, that will be 8 billion.

“The U.S. beef industry needs to have the opportunity to market globally, and then let the market sort it out,” Blach says. “If we allow the market to work, it's very efficient at finding the right answer. Unfortunately, it hasn't been allowed to work for since 2003.” Everything from export markets being shuttered for non-scientific reasons, to government policies artificially inflating grain prices, have stymied the market's ability to do its job effectively.

“At some point in the future, the economic factors that supported a cattle cycle in the past will likely return, but not for three to five years,” Blach says. There's too much global demand and too little global supply of grain and other commodities for the current cost-price squeeze to sort itself out quickly.

Traditional wild cards played in the current business environment would be magnified exponentially. Grain production short of predictions — or increased demand — could push prices up another steep slope. The same goes for other commodities such as oil. The federal government could intervene, too, as it did in the 1970s, with disastrous consequences.

On the other hand, Blach points out a sustained rally in the valuation of the dollar could curtail some U.S. grain exports.

Hedge against rising inputs

In the meantime, Blach says there are a couple of opportunities cow-calf producers need to consider embracing as a hedge against rising input costs.

“This is a period when cow-calf producers need to look at putting a couple hundred more pounds on their calves before merchandising them,” Blach says. The calf-to-feeder price spread continues to narrow as feedlots place more demand on cattle entering the lot at heavier weights. The lesson is to sell heavier cattle.

“There also continues to be tremendous opportunity to differentiate the calf crop,” Blach says. Price spreads for same-class, same-sex, same-weight calves and feeders in the same part of the world continue to be historically wide.

Whether it's for source verification, natural label eligibility or some other added-value attribute, Blach believes, “We'll see wider price spreads over the next couple of years as the market has more opportunity to express itself based on differentiation. That's a good hedge for cow-calf producers.”

On both counts, Blach says the further producers are from where the calf and feeder markets are made, the more they should consider adding weight and differentiating. At $4/loaded mile, discounts will continue to cut deeper the further cattle are from the market.

“We have to maintain an open mind as we move forward; it's a new frontier,” Blach says. “I believe it will sort out and we will find our way.”