It doesn't take Bill Mies long to roll out his best-case scenario for the next 18 months. That's because the beef management consultant with Elanco Animal Health has always been a realist — and the reality is that change is in the offing.
“I think the best-case scenario is we have a significant strengthening of the dollar against world currencies so that grain exports are slowed,” he says. Looking at it from a feedyard manager's perspective, he says that may put a little stability under the grain market, which would infuse a little stability in the cattle market.
A little. “When you're a margin operator, as feedyards are, you need to be able to predict your margin when you take risk. We can't do that today because we have no idea what the risk will be by the time we get a set of cattle finished, given the rapid way that energy and grain prices are changing our input costs.”
A strengthening dollar would also help domestic beef demand, he says, though he thinks demand in the next 18 months will have more to do with the price of pork and chicken than beef.
“I think we've reached spreads between pork, poultry and beef in retail and food service that will probably impede us from adding a lot more to the value of beef until the price of pork and chicken comes up to follow it. The differences are starting to get a bit high, and when consumers have fewer dollars to spend, they tend to make the choice of the lower-cost product,” he says.
So in a best-case outlook, Mies says, “we'll quit hurting so bad. It doesn't mean we're going to quit hurting at all; we're just going to quit hurting so bad and we'll inject a little more stability into our business.”
A more realistic assessment of the next 18 months is more sobering. The feeder-cattle market has been whipping and spurring its way to an unprecedented run of profitability for cow-calf producers. However, the bronc has begun to buck and it may be time to grab the saddle horn and ride it out.
Although a number of factors come into play, Mies thinks the most important is the need for the packing and feeding industry to adjust its size to supply realities.
“Emporia (KS) was the first plant closed. I don't think it will be the last,” he says. “I think the packing industry will adjust itself, not absolutely to the supply of cattle, but closer to the supply of cattle than what they are today.”
Feedyards also likely will adjust, something that sector has never done before. We've let pens go empty, Mies says, but in almost every previous case when a feedyard went broke, rather than locking the gates for good, it was resold, refurbished, refilled with cattle and cranked up again.
“And about five years ago, they started pouring more bunk space, and we're dramatically overbuilt for the supply of cattle in this country in the feedyard sector.” That's been good for the cow-calf producer, Mies says, with feedyards bidding up the price of feeder cattle to fill pens.
“But it's kept margins low to nonexistent in the feeding area. And the feeding area simply can't bear much longer the financial beating it's been taking on the last several turns of cattle,” he says.
So, for the first time to any significant degree, some feedyards may close for good. Others will refocus and become backgrounding facilities, providing feeder cattle to larger finishing yards, or replacement heifers to nearby dairies. And some will be sold, probably for cents on the dollar. “One way or another, we're going to reorder bunk space for finishing cattle to adjust it down closer to the realities of a 97-million-head cattle business in this country,” he says.
As cattle feeders adjust to a volatile grain economy, and feedyards and packing plants go through a shakeout in capacity, Mies says the guy who's going to pay for ethanol is the cow-calf producer. “The price of his product will get adjusted down to the realities of the cost of feed and the cost of beef going out the back door of the packing house.”
However, he doesn't think that will decrease the size of the cowherd or cause ranches to go out of business. “We've seen cow-calf guys go through bad times before and they're tough. They stick in there and they ride it out and the calves keep coming.”
Exports and demand
Beef demand, both in export markets and domestically, will continue to rise slowly, but Mies thinks there's misplaced optimism in terms of the increase in demand that exports will afford.
With the recent Korean beef agreement, our export future does have some shine to it. But it's not a done deal yet, dependent on if the U.S. upholds its end of the bargain and Congress passes the Korea-U.S. free-trade agreement (FTA).
Some senators, he says, are beginning to make noise about auto-industry issues. “But if we don't pass the FTA, our ability to put meat over there, regardless of what agreement we have, is going to be very difficult,” Mies says. “I think there are a whole lot of phytosanitary standards that have never been employed that could be brought to bear to keep meat out of that country if they really want to bad enough. If we don't do an FTA, they may want to bad enough.”
And it's not a lock that Japan will follow Korea's lead. More mistakes in shipping illegal product and that market may remain largely closed.
“I think exports are going to go up, but not as much as most folks predict,” Mies says. “Exports will be a nice backstop in our market, but won't be the market leader in terms of runaway pricing.”
Regulatory, political arena
After a long and contentious fight, the House and Senate passed a 13th hour farm bill last month containing language to make country-of-origin labeling (COOL) a little more palatable for cattlemen. But only a little.
“COOL will happen this year, but we're not even close to ready,” he says. If USDA writes regulations that allow COOL to be implemented gradually and gives cattlemen time to get up and running, Mies says maybe the industry can work its way through it.
“But we won't do it without cost, and we won't do it without pain. Stack that pain on top of a time when the profit is falling out from under you, and it's going to make it that much worse.”
Watering the corners
When you irrigate a square field with a circular center-pivot sprinkler, the four corners go unattended. When times are tough in the grain business, farmers water the corners to get all the production they can.
“That's where we are in the cattle industry right now. We've got to water the corners. We've got to use every last ounce of resources we can dream or scare up to cheapen this thing down as much as we can.”
The next 18 months won't be dull, he says. “You'll want to stay tuned because it's going to move fast and furious. You're going to have to be tough to make it through the next 18 months — tough, smart and quick.”
The next five years
High and volatile input costs — ethanol-driven grain and demand-driven fuel — may well force fundamental structural changes in the beef industry that will last for years to come, says industry consultant Bill Mies.
Take fuel, for instance. “Always before, if there was green grass somewhere, we could get cattle to harvest it. That may not be the case in the future with energy costs as high as they are. Our ability to go to grass will be affected by energy and transportation costs in ways we've never seen before.”
Then there are grain costs. “One of the things this ethanol ramp-up has taught us is the importance of being able to use as many cheap byproducts in the (feedyard) ration as we possibly can,” he says. That's counter to the mindset of the past 35-40 years, where feedyards tried to produce a ration as energy-dense as possible.
But ethanol-driven feed costs will force a major change in how cattle are fed. “We'll have to look at every byproduct possible,” and not just grain byproducts, he says. Food processing byproducts, like reject candy, broken cookies, snack chip waste, bakery byproducts — anything that has a usable calorie in it — is on the table. “We're going to have to figure out ways to handle them in the feedmills, and in our feeding practices, in order to cheapen rations down over the long haul.”