I've always considered myself an optimist. But at last week’s cattle-industry convention, I got huddled up with feedyard owners a couple of times and it was hard not to walk away with a pessimistic attitude.
Everyone’s read about the feeding sector’s losses in recent times, but numbers sometimes just feel like numbers until you talk to the people experiencing it firsthand. That’s the greatest thing about experience – once you’ve lived through a blizzard, written the check for $150/ton hay, closed out a pen that lost $200/head and paid that margin call – it gives you a different outlook than just reading numbers in black and white.
This year is one of the most unique because it’s easy to find vastly different perspectives within the same segment of the industry. Sure, all cow-calf producers are aware of the decline in prices that occurred after the financial crisis drove all commodities lower. But one's perspective is drastically different depending on whether you contracted your calves or sold them early, vs. later in the year.
The feeding industry would be similar, as some who were positioned correctly in the corn and fed markets actually had a very good year. Meanwhile, other feeders have had a year that would rival the worst ever experienced in terms of profitability.
We've known for a long time that the feeding industry was burdened with excess capacity, a lesson that’s been reinforced with the events of the last 18 months or so. We're also aware of what it will take to remove some of that capacity, but none of that makes it any easier to live with if you are in the business. The bottom line is that economics will dictate that some of that capacity is going to go away.
Still, there’s a lot of optimism; most of it is justified. Fundamentally supplies are tight and are going to either tighten or remain manageable in the foreseeable future. The American economy will eventually rebound; when it does, prices should take a dramatic jump. And that price jump could be explosive if one believes that inflation rates are likely to increase.
The bottom line is that once the economy turns around, those who have inventory are likely to reap huge rewards. The question that everyone is asking, of course, is when will the economy turn around? Very few are willing to speculate but everyone believes it is coming; it’s now a function of timing, and the actual timing is critical.