Used to be the cattle business ebbed and flowed to its own internal rhythms of cattle cycles, basis relationships and seasonal supply and demand
Used to be the cattle business ebbed and flowed to its own internal rhythms of cattle cycles, basis relationships and seasonal supply and demand.
Things like currency rates, a drought in Russia or an economic collapse in Japan seemed to make little difference.
“Now, all those things matter,” says Nevil Speer, Western Kentucky University animal science professor. “A fatal mistake in the business today is marching under old prejudices, believing the market will always be what it always was.”
Other than prolonged drought, outside forces have driven the industry since the turn of the new century, spawning historically long liquidation of the nation’s beef cowherd (see “Industry Next,” October BEEF, page 48).
There was BSE in 2003, the commodity price bubble a couple years later, followed by the housing crisis and the financial recession.
Through it all, the sea change in feed costs – due to the unintended consequences of domestic ethanol policy – has been the three-ton gorilla. He’s unlikely to leave as global population grows and the growth in global per-capita income resumes.
Rather than change the business model, this transition to higher costs magnifies different parts that need more attention.
Inherent model and challenges
In its simplest terms, the basic business model for commercial cow-calf production has been to wean the highest percentage and the heaviest weaning weight per cow exposed for the least cost. There’s no reason to expect that to change in the future, though the focus will likely shine more brightly on costs.
“At the end of the day, we’re still in a commodity business and those who control their costs are the winners,” Speer says.
“We’re a cost-focused industry, always have been and, in my opinion, always will be,” says Tom Field, National Cattlemen’s Beef Association executive director of producer education. “That’s not just in this country; that’s true around the world.
“As a commodity business, we’re limited by how much we can affect the final price of the product,” Field continues. “We’re not in a defenseless position, though. We have lots of value-added opportunities (such as source and age verification). But, the biggest impact we can make is looking for every opportunity to manage cost.”
Ken Odde, head of Kansas State University’s Department of Animal Sciences and Industry, emphasizes, “Even with all the efforts we continue to make in adding value, ours is largely a cost-driven industry. The most profitable operations are still largely defined by their ability to manage costs. The variation around cost is usually much larger than the variation around revenue.”
Part of that has to do with native industry characteristics.
For one, Field points out the cow-calf business is land-based and largely forage-dependent. As such, competition from other land-based enterprises, unrelated to cattle production, help define its value.
“That’s neither good nor bad. You have to recognize that you’re limited at some level by the price of land, and you have to be creative about how you deal with it,” he says. A ranch could rent and lease, for example, rather than expand through purchased land.
Adopting new, higher-cost technology is often a limiting factor within the model, too. Because of the exponential role input cost plays, Field explains, “you’re less likely to incorporate high-cost technologies that increase risk.” That’s not saying cow-calf producers won’t or don’t, it’s saying that cost risk will limit the speed of adoption.
Knowledge and diversification
That’s one reason Field says economies of scale matter in the cow-calf business. The inherent ability to dilute costs across more cattle offers producers with more cattle a comparative advantage relative to those with fewer cattle.
Consequently, Odde believes, “we’ll continue to have increasing herd size on the larger end and maybe some continued disappearance on the smaller end, but I don’t see it changing substantially.”
Incidentally, Odde thinks calves will have to fetch $1.50 or so (basis five-weight steer) to entice much expansion, given the current cost structure.
“I don’t know that we’ll have lots more cows or lots fewer over time,” Speer says. “I do see cowherds getting bigger on average and shifting to more diversified operations, leveraging capital and spreading risk across more enterprises where cattle become a by-product rather than the primary focus of an operation.”
For some, cattle have always been part of a diversified farming operation. Others who have specialized in cattle may need to leverage resources into other enterprises or exploit the full range of current production. Rather than sell calves the same, maybe there’s room for marketing replacement heifers. Rather than ship open cows in the fall, maybe feed them until prices are higher in the spring.
Field expects the U.S. cowherd to grow over time. Global demand for protein will grow. Some of the world’s most populous and resource-rich nations will likely forego investing in large-scale beef production.
“I think our inherent magic as an industry is that we produce a high-quality product,” Field says. “The scale of our business and the productivity per animal are inherent advantages. Because we produce in volume, customers here and abroad have more flexibility in how they buy beef.”
Sustainability favors some
“A sustainable industry is one that is sufficiently profitable, with either stable or growing demand, that allows new entrants to the industry over time,” Field says.
By that definition, these folks believe the current cow-calf model is sustainable. And it favors those dedicated to understanding and managing costs, those who understand margin risk, vs. those concerned only with price or production risk.
“You have to question everything, every practice as to whether or not it’s still the best way,” Field says. “Take a hard look at the total enterprise – land, equipment, labor, cattle – and see if there are more ways to leverage to add value.”
“Know your costs and manage your costs. Focus on reproduction and weaning a high percentage calf crop. Focus on the pounds of calf weaned,” Odde says. “I think flexibility describes any successful operation in any business – owners and managers who are in tune with the markets, environment, their operations and costs and who constantly evaluate current plans and new opportunities.”
“People who are really successful at this understand the value of time and how to invest their time,” Speer explains. “Working harder rather than smarter is a tough habit to overcome. As we place more capital at risk, we have to work smarter.”
As far as Field is concerned, the thorniest risk is freedom itself. He explains, “The biggest barrier to sustainability in our industry is that we must absolutely defend the opportunity for consumers to choose from a variety of beef products and absolutely defend the opportunity for beef producers to utilize a variety of management systems to provide those products.