One truism about economists is that even when they deliver good news, it’s always coupled with a caveat or two. Of course, there are practical reasons for that. For one, it gives them an out when their predictions don’t pan out, but actually they understand that the law of unintended consequences has a way of outsmarting even the most sophisticated of prediction models. The marketplace works, but the complexities and factors are pretty darn hard to sort out.
Pick up just about any article on agriculture and you’ll find that record price levels are part of the discussion. The main concerns in the cattle industry are whether cattle prices will outrun other input price increases, and whether overall demand from a macro-economic perspective will remain strong enough to push prices higher or maintain them at current levels.
Lately, we’re seeing a lot of economists begin to predict some pretty large increases in the price of food, with oil and a whole host of commodities at three-year highs – that’s not a prediction with a whole lot of risk. The question becomes how much will these higher prices restrict demand?
While food probably exceeds energy as being the one commodity that people will buy regardless of price (we all have to eat), beef and other commodities don’t enjoy the same demand price projection that oil or corn enjoy. At some point, higher oil prices equate to reduced consumption, but the beautiful thing for corn is that increases in oil price actually make it more competitive.
I’ve had a hard time wrapping my mind around the fact that corn is now linked to energy and energy demand factors as much as it is linked to feed demand. The difference with beef is we have significant competition from the competing protein sources of chicken and pork if retail price is an issue. In fact, some economists worry that beef could price itself right off the center of the plate in the next couple of years, as reduced supplies obviously equate to reduced consumption rates, which will mean a loss of market share that will be difficult to recapture.
From a producer standpoint, higher prices are usually seen as a very good thing. From an industry standpoint, if the focus is on the size of the industry, the concern becomes sustainability. We want a bigger, more profitable industry over a smaller and profitable industry.
In essence, economists are rightly concerned about the drivers of today’s higher prices. Prices in the beef industry are moving higher because of decreased supplies and increased competitiveness on a global basis (due to a weaker dollar, economic growth outside our borders, etc.), not by increased domestic demand.
The subsidization of ethanol equated to a smaller cattle industry and cowherd, so we needed to reduce numbers. However, if we overshoot that reduction in numbers by too much as the pendulum swings, then we could lose critical industry infrastructure and market share that will be difficult to replace.
I’ve never been one to hold too strongly to these price concerns, though my primary concern is and continues to be how to make our industry more competitive so that it can stop its seemingly endless path towards contraction. Certainly, we could reduce the size of the industry too much and too quickly, but I think the changes we are seeing are more reflective of a business model that’s changing where producers are demanding that cattle production be viable financially.
-- Troy Marshall