Damage control has to be uppermost in the minds of most ranchers in light of USDA's Dec. 23 announcement of a single case of bovine spongiform encephalopathy (BSE) in the U.S. The discovery has to have U.S. ranchers asking: “What kind of economic damage will this do to my ranch business?”
Over the last eight months, I've made several trips to Canada to work with Canadian ranchers facing the same economic challenge. In my work with these ranchers, I observed two philosophical approaches to their BSE crisis.
Members of Group 1 recognized they could do nothing to impact market prices. As a result, they focused on what they could impact — their own beef cow herd's production level and their herd's unit cost of producing a hundredweight of calf (UCOP).
Meanwhile, Group 2, unsure that foreign borders would ever reopen to Canadian beef exports, focused their emotional energies on getting things back to “the way it was before.” They used their management energies to fight the border closure, the broken marketing system and politicians.
Group 1 ranchers recognize it's not “management as usual.” They have faith the U.S. border will reopen — it's only a matter of when. They're managing to survive until that time comes.
While market delaying tactics are high in the minds of Group 1 ranchers, they're pressured by cash flow needs. They know many bankers are nervous and are asking for added security deposits.
Group 1 also understands that ranchers with the lowest UCOP will survive the crisis best, regardless of the absolute level of domestic market prices. And, they recognize that becoming a low-cost producer is something they can directly control.
So, Group 1 ranchers used the beef crisis as motivation for an all-out effort to intensify their herd management programs. They focused on lowering their herd's UCOP and on surviving until the border reopens. Their fundamental strategy is “to own cattle when the border reopens.”
That's not to say that all is great for Group 1 members. After all, their emotions are in a roller-coaster state, going up and down as the border closure continues with no certainty as to when it will reopen. No one can remain positive all the time, but these ranchers are positive most of the time.
I recommend U.S. ranchers do everything they can to put themselves into Group 1. Focus all your management energies on what you can impact. What you can impact is your herd's production level and your herd's UCOP in 2004, 2005 and 2006 calves.
At this point, I project 2004 market prices will come under considerable pressure though much of 2004. Initially, that may mean a drop of as much as 20% below fourth-quarter 2003. Given that exports account for about 10% of U.S. domestic production, U.S. beef consumers will have 10% more beef to consume. This extra beef could become a drag on U.S. retail beef prices.
“Price flexibility” is the economic term used to measure a market's price response to changing supply. With estimated price flexibility for beef of 1.6, a 10% increase in domestic beef supply is projected to lower beef prices by 16% (10% × 1.6). I'm anticipating another immediate 4% drop in beef price due to enhanced consumer food safety concerns. This adds up to a projected 20% immediate drop in beef prices.
The key to a market recovery is having U.S. consumers stay with the beef industry like Canadian consumers did with Canadian beef producers. Thus far, U.S. consumers appear to be staying with U.S. beef. On Dec. 29, the National Cattlemen's Beef Association said that, after talking to foodservice and retail companies, it found “the companies reported no significant slowdown in beef sales and that consumers are still buying beef.”
While a projected immediate 20% drop in beef prices sounds and is serious, with the industry coming off record highs in fourth quarter 2003, these projected prices aren't as bad as one might initially think. I took this projected 20% price drop in 2004 and applied those prices to my IRM Demonstration Beef Cow Herd to simulate what kind of financial impact a 20% price drop might have on U.S. ranches in 2004. This demonstration ranch produced 557-lb. calves in 2003 that were sold in late October for $112/cwt. for the steer calves.
Steer calves, heifer calves and cull cows were priced at a 20% discount for 2004. Surprisingly, the 2004 projections for my IRM Demonstration Herd still generated close to $100/cow earned-net returns to the unpaid family and operator labor, management and equity capital. How many years has your family generated $100 profit/cow?
A 20% drop in steer-calf prices suggests $92 steer calves for fall 2004. How many years have you sold calves above $92/cwt.?
Whatever happens in 2004, the tendency will be to compare it to 2003 — a year of record beef prices. I think most ranchers will be able to live with a 20% drop from fall 2003 record prices.
Damage Control Strategies
Clearly, it isn't “management as usual” for U.S. ranchers. Markets will overreact and market timing will become critical for cattlemen in the coming months. Optimum market timing in 2004 probably won't correspond with your peak cash flow needs. Visit your banker early to apprise him or her of your new marketing intentions.
Cattlemen will undoubtedly be dissatisfied with market prices in early, and maybe all of, 2004. Many may choose to hold cattle to take advantage of later market corrections. Canada's experience suggests markets will readjust later.
U.S. ranchers will focus on market-delaying strategies. Selling 2003 calves as backgrounded calves or yearlings off grass, or as finished cattle, could be an effective market-delaying strategy.
Given where we are in the cattle cycle, converting 2003 heifer calves from feeders to bred females would be another market-delaying strategy. I expect low-priced heifer calves will stimulate heifer retention on a national basis.
Now's the time to tighten down the ship, increase your management power and lower UCOP. If a rancher can lower production costs by 5% annually the next three years, the average cost of producing $100 calves in 2003 will be $85 in 2006 — just the year that we could see another price-cycle top.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].