We’d all like more producers and/or more cows, but only if those increases are created through increases in demand or efficiency.
Three different economists have written me in the last week exasperated at the economics, or lack of economics, that some people have been applying to the whole issue of lean finely textured beef (LFTB).
The discussion centered around the contention made by some that the loss of LFTB would require 1.5 million cows to make up the protein difference, and this would be good for the beef industry. At the risk of being too simplistic, let’s say that a consumer is willing to spend $10,000 for the production of 20 cows and that production is 10,000 lbs. That would equate to $500/cow. Now, if it took you 30 cows to produce that 10,000 lbs., and all things remained equal, you would receive only $330/cow. The point is that an additional 1.5 million cows isn’t a good thing if demand doesn’t grow correspondingly.
The real math is that without LFTB, every 1 lb. of beef costs more to produce, which equates to less profit, not more. And, that ultimately will lead to a smaller herd, not a larger one. Increased efficiency per cow or per carcass is positive from a profitability standpoint.
Another way of looking at this is that if the big processors can cover the cost of processing an animal with the value they derive from the drop credit, and a smaller producer requires the drop, plus $240, to process an animal, then the smaller producer to maintain similar margins must pay hundreds of dollars less for the same animal.
These economists’ point is simple – we’d all like more producers and/or more cows, but only if those increases are created through increases in demand or efficiency. Increases that result because of lack of supply or declines in efficiency will actually lead to a smaller and less profitable industry for everyone. And, it actually encourages more consolidation within the industry.
We’ve seen the basic misunderstanding of economics being applied in the past to the export and import debate as well. We aren’t seeing these faulty arguments as much today, since the tonnage levels of exports have exceeded the amount of imports. But, even then, it wasn’t pounds that told the story, but dollars.
Actually even total dollars was misleading as it is overall carcass values that matter. This bad math usually makes the case that someone is ripping the cow-calf industry off, but it also certainly doesn’t do anything to actually lead to a larger more vibrant cow-calf industry.
Best wishes for a happy Easter!