My conversations with cattlemen indicate that many producers acknowledge the positive economic indicators, but their gut tells them to be cautious about expansion.
Every week, it seems I read another article about an economist declaring it’s time to see expansion in the cow-calf side of the business. The numbers would certainly seem to back that up:
• The drought affects less of the country than in recent years, and significant moisture has fallen in some of the driest areas in the country over the last few weeks.
• Calf prices continue to rise, and we’ve seen a contra-seasonal increase in calf prices of over $20/cwt. since May.
• August feedyard placement numbers were down 11% compared to a year ago, and expectations are that the decline not only will continue but is somewhat of a permanent nature.
• If you want to know calf prices, look at available supplies, grain and feed prices, fed-steer prices, price expectations, demand indicators, exports and feeder profitability. All those factors are on the upswing. In fact, the only one of those factors that is questionable looking forward is the fed cattle profitability number.
• Consistent feedlot profits may still be tough to come by as the industry continues to wrestle with overcapacity. But overcapacity is price-supportive to calf prices as well.
• The financial industry tells us that agriculture in general looks good. Rising land prices and lower grain prices have created concerns about another farming bubble, but debt ratios are nowhere close to what they were in the 1980s. Plus, the financial position of producers is so much better on average than at that time, which makes the comparisons weak at best.
My conversations with cattlemen indicate that many of them acknowledge and understand all these positive numbers, but they are resisting expansion because their gut tells them it’s still wise to be cautious. One producer told me that everything he reads, hears and sees is telling him to be aggressive, but he just doesn’t feel comfortable pulling the trigger.
I do think there are a multitude of reasons why people are more hesitant to expand their herds than in the past. And some of those reasons are number related as well.
First, producers are older on average, and expansion entails more risk and more capital than ever before. Secondly, agriculture in general has seen a significant shift in how it views beef production.
Many grain farmers formerly raised cattle as both a form of diversification and as a significant contributor to profitability. Livestock was a natural form of risk management; when grain prices were low, it often made sense to feed it to cattle.
The shift to the ethanol era changed those dynamics, as livestock production added little to profitability for most farming operations. The addition of a new customer that consumed as much grain as livestock removed the reduction of risk that was associated with a cattle enterprise.
Small producers are not only the backbone of our industry, but they’ve historically been the driver of both expansion and liquidation. As per-cow capital investment has increased dramatically alongside the advantages inherent in economy of scale, smaller producers have been more hesitant to expand.
A small-scale producer recently told me that he has more than enough grass to double his cowherd to 30 cows. He maintains that increasing his herd to 30 cows ought to increase his profits by nearly $2,500/year. However, the additional 15 cows would cost him nearly $30,000 and his out-of-pocket expenses would jump by $6,000/year.
He thought he’d have to buy some additional hay as a hedge against bad winter weather, and possibly an additional bull. Nor was the additional labor all that appealing, either. His contention was that while such an expansion might pencil out, his family would be happier with fewer cows and the option of spending that extra money on a nice vacation.
Interested in more industry hot topics? Subscribe NOW to BEEF Daily for the latest industry news every Monday-Thursday.
I don’t have any numbers to back this up, but my gut also tells me that people are more cautious because of all the bumps in the road this last decade. And it goes beyond drought, BSE, and ethanol – all of which have dramatically reshaped and resized our industry.
The overall economy continues to be lackluster at best, and that is a big factor, not only as it relates to beef demand but because of the fact that the average producer derives most of his/her income from sources off the farm/ranch. The deficit and government regulation are like two water balloons hanging over everyone’s head, and they’re getting bigger and bigger. Everyone knows that eventually they will pop.
There are a whole host of factors like this that I believe are making people slower than in the past to expand. Improved moisture conditions may get the ball rolling on heifer retention, and we’re already seeing cow slaughter numbers decline. But I don’t think the economists have factored in that many cowboys are thinking expansion while their gut is urging caution.
You might also like: