In the short term, I believe expansion will continue to disappoint the experts.
If you watched the latest Superior Video sale, you likely noted there were a significant number of calves being sold for fall delivery that were grossing $1,500/head. It isn’t uncommon to talk to sellers this year who are receiving $400/head or more on their calves than they garnered a year ago. And they were plenty excited and comfortable with the prices they received a year ago.
The conventional wisdom is that expansion will be in full swing this fall, as Mother Nature seems to be finally allowing for widespread expansion. However, there’s a whole new host of factors that economists now must plug into their models.
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First, there are the hard numbers that may limit or slow expansion. One is the sharply declining number of pasture acres, as pastureland continues to be diverted to farming and recreational use, or is usurped by urban encroachment. This is a reality that, like the increased risk and capital required for expansion today, has been discussed extensively.
The factors I wonder about are those we haven’t experienced in the past, which makes them more difficult to factor into the equation. Back in the old days, what we considered to be “good” profits encouraged expansion. In large part, this was because those profits were still minimal enough that expansion was required to enjoy an average American lifestyle. Our industry has never been faced with the decisions that producers will be making this fall.
With the market windfalls that are possible today, do you pay your bills and buy a new pickup? Do you cover the costs of your kids’ college educations? Or do you take that vacation you’ve been promising your bride for 20+ years? When your business must expand to provide for your family, expansion of your business, when given the opportunity, is a given. However, today’s prices make that that decision no longer solely a financial one, as an acceptable standard of living from a financial standpoint is being obtained for the first time without undergoing an expansion.
Are producers going to add 100 cows and invest $300,000 to do it? Or will they use that money to pay off debt, upgrade the tractor, and remodel the kitchen? I have seen this dynamic in other segments and businesses; when a business actually begins to provide excess cash, and that heightened level of income appears to be sustainable in the short term, it's just human nature to want to enjoy the fruits of one’s labors.
I think that’s particularly valid when today's costs of expansion and level of risk have moved to levels that used to be unthinkable. Expansion decisions are now competing with other business opportunities, from diversification to purchasing land, that weren’t part of the decision process in the past.
Yes, eventually economics always rule, and our industry will even begin to attract new capital and new players if these types of margins persist. However, in the short term, I believe expansion will continue to disappoint, and confound, the experts.
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