The beef industry is undergoing large-scale change. The U.S. beef cowherd continues to downsize and fewer finished cattle are being harvested. In fact, a national discussion is emerging over the industry’s long-term sustainability. But, perhaps a more appropriate question for the beef-cow sector specifically is:
What will the new downsized beef industry look like, and which ranching regions will be most affected?
Economic theory suggests that, with everything else held constant, downsizing is the expected impact of a dramatic increase in the price of a major input. This is happening in the beef industry as increasing corn prices lead to fewer feeder calves being produced.
We’ve already seen ranching (beef-cow enterprises) decrease in major grain-producing areas. A major economic question remains as to which other regions have the economic competitiveness to continue producing feeder calves and which regions will reduce or even eliminate feeder-calf production. Some range-based areas may not have any alternative but to run beef cows, in which case economic theory suggests that asset values may well decrease.
Let’s take a look at some economic forces changing today’s ranching business. Cattle feeders are competing for corn. In fact, Robert Wisner, Iowa State University emeritus professor, says total corn use for fuel-ethanol production will be only about 10% less than its use for livestock and poultry feeding in the year ahead.
Current law mandates increasing U.S. biofuel production for the rest of this decade, but eventually not all this biofuel production will come from corn. While cellulose-based biofuel may someday replace corn ethanol, production of this cellulose raw material could still compete for prime farmland. Thus, grain prices could still be impacted when added cellulose-based biofuel becomes a reality.
The net result of this current and projected increased corn demand has been a dramatic increase in overall corn prices leading to increased costs of gain (COG) beyond the ranch gate. This negatively impacts cattle feeders whose only feasible action is to pay less for feeder cattle.
Corn price volatility has added even more challenges to cattle feeders. One effect of the past 50 years of government feed-grain programs has been historically stable corn prices with relatively little price volatility. As a result, cattle feeders became accustomed to relatively slow legislative changes in corn prices. And ranches basically didn’t have to even monitor corn prices in the overall management of the ranch. This isn’t true today.
Livestock demand for corn is no longer the main corn-price driver. Whether market-driven or policy-driven, the result is that corn prices and ethanol prices are closely tied together. Figure 1 shows weekly corn and ethanol prices at Iowa ethanol plants since the start of the 2007-08 marketing year. Not only does ethanol price explain 90% of the variation in corn price, but the relationship is evident over the entire wide range of ethanol prices during the last couple of years.
In the old normal, feeder-calf prices were determined primarily by the supply of feeder calves driven by the cattle cycle. At the top of the cattle cycle, the large supply of feeder calves were low priced causing ranchers to sell off beef cows. At the bottom of the cattle cycle, feeder calves were in short supply and generated high feeder calf prices leading to an expansion in beef cow numbers. A complete cycle took from 9-12 years. The nation’s beef cowherd is now in its 14th consecutive year of liquidation, and it may well be a few more years before a herd expansion is triggered.
The cost side of ranching isn’t helping, either. Figure 2 presents the unit costs of producing a hundredweight of calves in the Northern Plains for years 1993-2009. Production costs have even accelerated upward in the biofuels era. Apparently, increased production costs are also a part of the biofuels era.
Increasing production costs and weak market prices for feeder calves isn’t a good recipe for beef-cow profits (Figure 3). Corn prices started up in late 2006 and remained high as we progressed through the biofuels era. The first half of Figure 3 was due to the cattle cycle; the second half is due to the biofuels era.
Not all beef-cow producers are currently generating the same economic returns from their beef cowherds. Figure 4 presents an economic summary for the low 20%, the average, and the high 20% of the 2009 Northern Plains database. Remember, 2009 was a tough year for the beef-cow sector. While the average beef-cow producer in this database generated a loss in 2009, the top 20% of producers generated a $71/head average profit in this tough 2009 business year. Not all herds are performing equally.
As a final point to this discussion, I will share my current long-run projections for Northern Plains beef-cow producers. I rely heavily on USDA and baseline economic projections from the Food and Agricultural Policy Research Institute at Iowa State University and the University of Missouri in formulating these projections.
Lower projected beef-cow numbers are projected to add some economic support to feeder-calf prices. In addition, many Northern Plains herds gain some economic strength from their diversified beef-cow/cash grain family business structures. Beef cows provide income from land that can’t or shouldn’t be farmed.
Figure 5 presents my net-cash-flow-per-cow projections for high-equity Northern Plains beef cowherds. Figure 6 presents my projected economic net returns/cow for those same Northern Plains beef cowherds. I conclude that if both of these projections come true, the Northern Plains will be a competitive region in the “new normal” for the beef-cow sector.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected].