In the past, if you asked me which factor is the most important in determining profitability in the cow/calf sector, I would have said supply and demand. If asked the question today, I would probably answer it the same way, but with hesitation. I certainly wouldn't call it a positive development, but the role of government is becoming increasingly important.
The impact that government decisions have on our business is growing at a phenomenal rate, while at the same time, rural, agricultural and beef industry political clout is diminishing relative to other political demographics, many of which are in opposition to our industry. It's to the point now that, while it is great to talk about supply and demand constraints, the most critical thing to know may be what will play out in the beltway. Certainly, it's still correct to talk about increasing the efficiency of production and improving the quality of our product, but what happens in D.C. may be the biggest determinant in the future.
Look at several issues that Congress is working on. This week a coalition of ag groups, including NCBA, the American Meat Institute and National Meat Association, sent a letter to Congress asking them to take a cautious approach to the Renewable Fuels Standard (the current one expires in 2012, a new standard is expected to be included in this year's farm bill). The ethanol subsidy has already reshaped the underlying economic principles this country was built upon, and government mandates in regard to renewable fuels could have as much impact on the beef industry's long-term prospects of profitability than anything else.
This week also saw continued frustration over the reopening of the market in South Korea. Not only is the Korean/U.S. Free Trade Agreement hanging in the balance, but so is our inability to get other nations to follow international standards as well. We have stopped the slide in domestic beef demand, but in the long-run, the U.S. is a mature industry. Future demand growth will be dependent on the other 96% of the world's population adhering to scientific-based global beef trade.
Then there are outside factors ultimately influencing beef demand, such as tax policies, disposable income, inflation and other economic drivers. Food inflation is currently running at twice the rate of other inflation due to ethanol subsidies and higher energy costs. Long-term, we know this trend cannot continue.
The weakening U.S. dollar has been great for ag, leading to more exports and less imports, but, as with budget deficits, there are numerous cause-and-effects, such as exporting of inflation to economies like China. China has become the primary economic driver alongside the U.S. in the global economy. Regulatory rules and dictates on environment, animal welfare and the like are constantly adding costs but without any subsequent increases in value. Cost of terrorism... the list goes on.
This is the time of year when ranchers are preconditioning, weaning and preg-checking. Maybe calls to our congressman, attending state and national cattlemen meetings and donating dollars to our industry's PACs will be just as important on our planning calendars.