Record prices, tightening supply and steady demand – that’s a formula many of us on the cow-calf side of the business have been looking for!
It doesn’t even seem right when you start talking about $110/cwt. fed cattle; it seems like it wasn’t all that long ago that we would have thought that was a decent price for five-weight steers.
Agriculture is a bright spot in the U.S. economy. The dynamics of grain production have forever changed with ethanol; not only are prices subsidized but demand is mandated to increase at an incredible rate. With dry weather in Brazil, soybean prices are heading up and the talk now is how high will the various grains have to go to purchase enough acres for planting?
This is a golden time for grain production; as a result, ag income is setting new records each and every year. Ag land values, despite a global economic downturn, are on the march – fueled not only by grain profits but an influx of investors looking to use land and commodities as a potential hedge against inflation in the general economy. And, U.S. ag is expected to increase its competitiveness on the global markets with what most expect to be the inevitable decline of the U.S. dollar.
Locally I’m seeing people plant former Conservation Reserve Program (CRP) land to wheat or corn, and generating one-year profits that more than cover the original purchase price of the land. It’s an amazing time.
Of course, there are always two sides to the coin. The rising value of land, especially on grassland, is continuing to widen the spread between land values and what it actually returns from production. With the industry facing a major generational turnover and fewer young people coming back into ag, we’re seeing a decline in landowners who actually do the farming and ranching.
The implications of this shift may be as dramatic as ethanol was to the industry’s business models. The old model was that cows broke even with what they were charged for lease, and producers accumulated wealth via the appreciation in land values. Obviously, that can’t work if one doesn’t own the land; the cows must be profitable.
This factor, when coupled with declining cow numbers, would indicate that lease rates should decline, but declining cow numbers haven’t resulted in a declining demand for grass. Ethanol made grass gains essential and more viable, and the increased demand for grass for stockers has more than offset the decline from cows.
Then, factor in hunting, fishing, lifestyle demands, urban encroachment and the like and, while we certainly don’t have a shortage of grass in the U.S., it isn’t abundant either.
I suspect we’ll continue to migrate toward the European model of a landed gentry with folks either doing the production for them or having a lease/share type of arrangement.
The industry has struggled to find a new equilibrium, with ethanol, BSE, drought, a global recession and rising input costs all coming together to form a perfect storm. We knew we had to have a smaller industry. But it appears we’re seeing the perfect storm setting up now, with global demand slowly returning, domestic demand showing signs of stabilizing, tighter supplies finally showing up after masking the effects of liquidation, with heavier outweights, pulling inventory forward, and increased heifer and cow slaughter.