Cattle Economics

Is The Current Cattle Industry Business Model Sustainable?

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“Despite worldwide population demand for beef, the U.S. beef industry is contracting,” says Barry Dunn, dean of South Dakota State University’s College of Agricultural and Biological Sciences. “For the first time, we’re questioning the sustainability of the beef industry in the U.S.”

Though Dunn may have been the first to pose the dilemma so publicly – the recent Beef Improvement Federation meeting – it’s a wonderment that’s been nagging the minds of a growing number of producers.

“We’ve lost a third of the beef cattle producers we had in 1980 and the industry infrastructure is eroding,” Dunn says. “There are areas of the U.S. where you can no longer find a semi to haul cattle or, if you can, you can’t afford to. There are areas of the U.S. where cattle producers literally have no access to a large animal veterinarian.”

Everything seems out of kilter. Price signals and relationships that defined the beef industry since halfway through the last century grow more unreliable.

As Dunn points out, even with calf and feeder prices near record-high levels, the national cowherd, for all practical purposes, has contracted for the last decade (see “Expanding In Today’s Market, ” `page 23).

“Many of our basic assumptions appear to have been naïve,” he says.

For instance, Dunn points out that, until the last couple of years, the industry believed the price elasticity of demand was constant. In other words, as prices increased, consumers would consume less beef and vice versa.

Instead, the current recession proved price elasticity for beef demand is more complex. As consumer finances were challenged, they indeed paid less for middle meats, but were willing to pay more for end meats and ground beef.

Another basic assumption has been that producers can invest their way to profitability. Whether it’s running more cows and feeding more cattle to achieve economies of scale, or adopting new technologies that offer incremental gain, the notion has been that the more you spend – wisely, of course – the more you can make. Instead, the opposite can be true because of an inexact understanding of industry profit drivers, Dunn says.

For instance, he adds, “We fool ourselves into thinking we need to accelerate the generation interval in our herds and turn generations quicker. But that strategy increases depreciation, which is the second-largest cost in commercial beef production. Depreciation results from the cost of raising replacement heifers or buying bred females. The higher the depreciation cost of a heifer or cow, the higher the depreciation cost of her daughters and so on. For long-term profit, you need as many fully depreciated cows in your herd as you can get.”

Dunn explains the most popular strategy for beef improvement has focused on increasing the gene frequency of economically relevant traits within a population. Instead, he suggests new opportunity may come through epigenetics.

In rough terms, epigenetics is turning genes on and off through management. Think here of fetal programming – the epigenetics of pregnancy. Consider the insightful work done by Rick Funston and his University of Nebraska peers in recent years that illustrates how supplemental feeding of cows influences the subsequent reproductive ability of those cows’ daughters.

Argue all you want, but the marketplace is never wrong. Rational response to the market dictates the size and shape of industries. For the past three decades, the marketplace has told feedlots, packers and beef retailers to consolidate and concentrate. The marketplace has told the cattle industry to reduce cow numbers, especially as beef production per cow has increased.

“But the associated price tag of declining infrastructure and capacity may prove too high,” Dunn says.

We’ll search for answers to beef industry sustainablity in an exclusive BEEF series beginning in October.

What's Cattle Economics?

Wes Ishmael provides tightly focused analysis and commentary on specific beef quality and marketing issues of practical importance to beef producers.

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Wes Ishmael

Among the industry’s most insightful thinkers, Wes Ishmael concentrates on industry price and market perspectives for BEEF magazine. Along with his monthly “Cattle Economics” column...

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