Headline after headline this week hailed a 2007 that would be a better year for the feeding industry. While that may be the case, it requires a little perspective, given the fact 2006 was the worst year for feedlot profitability in the last 30.
All the optimism stems from the fact domestic beef demand has surprised some people with its strength of late, and exports are expected to increase. As long as the economy continues to percolate along, demand is expected to hold its own.
Futures prices this week are well above the levels fed cattle traded a year ago for the same time frames, and the industry is going into the year extremely current. Still, beef production isn't expected to decline, and available supplies of feeder cattle are expected to be very similar to 2006.
The bottom line is an improved outlook doesn't mean the feeding industry will return to profitability in 2007. Excess capacity is chasing a steady supply, and economic models driven in a big way by capacity utilization mean profits will remain tough to achieve in 2007 without help from the demand or supply front. And that isn't foreseen.
It's important to keep in mind that prognosticators also are calling for nearly steady profit levels on the cow-calf and packer sides of the business. It's a little like a rancher who's suffered through one of the worst droughts in history being told next year will be better. The question that needs answering is: "how much better?"
I'm actually very bullish on the beef business and the overall economic picture. But the reality is the explosion in subsidized ethanol production has driven corn significantly higher. Meanwhile, expansion has greatly slowed, and the demand growth that helped us maintain record periods of profitability on the cow-calf side has slowed, and possibly even reversed itself.
The number-one trend occurring in all business segments is that averages are becoming increasingly more meaningless, and price differentials between products based on quality and brand value continue to widen. As a result, aggregate profitability calculations are becoming less meaningful.
Yes, the average cow-calf producer will consider 2007 a prosperous year, and the average feedyard will experience improved returns, etc. But the variation around the mean is what's expanding.
Some cow-calf operations will post record profits in 2007; others will be challenged. That scenario will be repeated in every segment from seedstock to the retailer.
Commodity price assumptions are a valuable tool, but their interpretation becomes far more complicated each passing year. That's the effect of an industry continuing to transition a larger percentage of its product and marketing away from commodity to value-added pricing systems.
-- Troy Marshall