I love the line, “It was the best of times; it was the worst of times.” I think I like it so much because it so often describes the cattle industry.
Perhaps that line applies more today than ever. Sit down with a group of cattlemen and there isn’t a whole lot to complain about as it relates to the marketplace. Prices are record-high and there’s little reason to expect them to move backward anytime soon.
Count me in on the side that’s pretty darn bullish on the prospects for cow-calf producers for a considerable period of time. In fact, I think the market is shaping up to produce excellent price levels for a longer period of time than what we’ve typically seen in previous cattle cycles.
From a cattle feeder and packing perspective, of course, higher calf prices aren’t necessarily a good thing. Yes, these sectors are also looking at unprecedented price levels, but excess capacity chasing tightening numbers isn’t a prescription for sustained profits. The cow-calf industry is often seen as the tail end of the whip, with the consumer and demand being the handle that controls its movement.
The liquidation the industry has experienced is different than in the past, in that it isn’t declining demand or increased numbers that drove the liquidation, at least not in the classical sense. It was significant market disruptions like BSE that virtually removed exports for a time (some of the issues that BSE caused in the global market place are still with us, but the impact continues to decline). It was also structural changes to our business with the aggressive subsidization of ethanol that dictated a smaller cattle industry (these changes are likely permanent or at least as permanent as the subsidization of ethanol is).
Of course, higher prices have everyone talking expansion, and speculation on at what point it will be triggered. Again, the news is good for the cow-calf sector because though it will be facing increased fixed and variable costs moving forward, as well as more volatility and risk, prices will rise at least to the point where liquidation comes to a stop. Of course, the reality of higher input and fixed costs is that profits will have to be larger than in the past for producers to justify expansion.
The bull market is a perfect microcosm of the cattle industry as a whole – significantly higher prices. Part of the decline in numbers has been caused by temporary factors like BSE, but real-world drivers are at work, too (fewer cows equate to fewer bulls). In both cases, the decline in supply has exceeded the decline in demand, and prices are rising to help spur additional production.
The $60 question is what it will take to begin expansion. Your perspective on the market depends on whether you have the product people want (or don’t want), whether you’re buying or selling, or whether you have adequate or insufficient inventory around you to take advantage of the higher prices.
Today’s bull market is great news for those with established reputations and higher-quality genetics. But it’s bad news for smaller, less established or multiplier genetic suppliers and breed associations. The signal for increased numbers is out there, however.
-- Troy Marshall