When an industry is expanding, too little supply exists relative to demand. That fuels enough economic incentive, relative to risk, for increased production. Meanwhile, economic growth comes from selling more production at higher prices, sometimes with little regard for incremental increases in the unit cost of production.
The opposite of all that is true, of course, when an industry is contracting. Too little demand exists relative to risk, so there’s no incentive to maintain, let alone grow, existing levels of production.
Increasing net returns in such a negative scenario often comes down to achieving current production, while decreasing the cost of that production; or increasing the level of production at the same or less cost per unit of production. That’s been difficult for cattle folks to do in recent years, no matter how sound the management, thanks to skyrocketing feed costs that run ahead of record selling prices.
Price Outlook: 2013 Setting Up For Higher Cattle Prices
If Mother Nature cooperates this year and spawns a bumper corn crop, plenty of analysts peg corn prices sharply lower – in the $5-$6/bu. range. In turn, some expect the nation’s cowherd to finally expand.
It’s worth remembering that the nation’s cowherd has contracted for 15 of the past 17 years. Since the peak in the mid 1970s, cyclical expansions and contractions mirror a gradual downward spiral, though the use of technology has propped up beef production in relative terms. Consequently, any expansion this year or later will likely be very flat.
Consider the most recent U.S. Baseline Briefing Book from the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. Between now and 2022, FAPRI projects the nation’s beef cowherd to grow to 30.3 million head in 2018 (it was 29.3 million on Jan. 1, 2013), and then contact to 29.1 million head by 2022. So, basically it’s projected to be 1 million on the way up, and 1 million on the way back down.
For some historic perspective, the beef cowherd at the beginning of this year was 35% less than its peak of 45.4 million cows in 1975. It’s 12% smaller than in 2000.
Incidentally, between now and 2022, FAPRI projects net cow-calf returns at $106.33/head this year (it was $62.18/head last year), growing to $150.24/head in 2015. It will then decline to a negative $15.18/head in 2019, then increase to $39.98/head by 2022.
Part of the projected flatness has do with the fact that even sharply lower corn prices akin to those mentioned earlier would still be at least two times more than when the models for modern beef cattle production were established.
Part of the static vision has to do with economic incentive relative to risk and alternate land use, especially for cattle producers who find themselves on the lower rungs of the net-return ladder.
As always, wherever those averages fall in reality, some folks will make a lot more than average, and some will make a lot less than average. Some enjoying the economic bounty will have figured out how to generate more revenue per head via partnering, value-added programs and the like. However, it’s a safe bet that most folks with more net return will have figured out how to produce more efficiently and at less cost.
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That presupposes plenty, such as these folks actually knowing their costs, knowing their costs relative to the industry spectrum, and figuring out how to achieve goals derived through that knowledge.
Years ago, when the cattle business was going through its first earnest, industry-wide alliance attempts, a good friend of mine – with a knack for bottom-lining any situation – told me he didn’t know where the cattle business was headed, or how alliances would pan out. But, rather than trying to polish a crystal ball, he figured if he and his family’s operation could be among the top 10% of his industry sector for low cost and high revenue, then they’d be around for a long time.
And, they have been.
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