Given the incredibly strong market fundamentals at the current time, it’s been said that only three things could keep the cow-calf producer from being profitable the next couple of years:
- Drought,
- Escalating input costs or
- The global economy, government policy or some other outside demand threat.
While those factors amount to about as little risk exposure as a cattlemen can ever hope to expect, each of them are roughly 50/50 propositions right now.
So far in 2012, the weather situation is looking fairly optimistic. Texas and Oklahoma, with the exception of the Panhandle, were getting some moisture. The Northern Plains wasn’t getting much, but there was plenty of feed and residue grass. Plus, the mild weather made for some great calving conditions, while crop plantings were running ahead of schedule.
From the corn crop standpoint, the weather conditions have been close to ideal. The moisture isn’t abundant but the rains have been timely, with the experts projecting the largest corn crop ever harvested. That will help to keep ration costs down, and strengthen prices.
The hay situation is a little different story. Last year’s drought in the South created record prices and unprecedented hay movement from North to South. Thus, despite the phenomenal production last year, the carryover is minimal in the good areas and non-existent in or near drought areas.
Currently, a good portion of the Northern Plains is abnormally dry, while the southeastern-most portion of the Southeast is experiencing drought. In fact, a few sale barns already are requiring producers to schedule pairs in advance because the runs are getting large enough that they can’t handle them all.
The irony is that while prices are good, costs are high. Thus, with cows being worth what they are, producers are being much quicker than normal in pulling the trigger on sending cows to town. If the dry weather persists, hay prices are expected to be high enough that people will sell rather than try to feed through a drought. The ironic thing is that if conditions don’t improve and we see another round of liquidation, we could see prices that nobody could have imagined five years ago.
Feed and fuel costs remain two of the biggest concerns on the input side. So, while inflation has remained largely in check, it certainly hasn’t relative to input costs for the cattle industry. While it doesn’t appear right now that we’ll see any great shock that will send prices soaring, a major confrontation in the Middle East or something similar could spike prices.
It’s important to note that oil prices fell below $90/barrel this week, and supplies hit a 22-year high. And while it’s good news that most economists are talking about a decrease in energy prices being as likely as an increase, those projections sadly are based on a weak global economy that could get worse, meaning lower demand and less disposable income.
While all these factors are somewhat related, the third potential hurdle is from forces/events outside our industry. Again, the news is a little disheartening; the unemployment rate has fallen, but the number of people working also keeps falling despite a growing population. The situation in Greece remains tenuous and the fears are legitimate that if Greece falls, others nations will follow.
Then, of course, we’ve experienced the significant impact from the fiasco over lean finely textured beef, followed shortly thereafter by a fourth confirmed case of BSE, this one is a California cull dairy cow.
I hate to mention that groups opposed to livestock production seemingly are gaining momentum. And, the Humane Society of the U.S. has been widely successful with its new strategy of trying to align with disenfranchised groups within our own industry to lend credibility to its attacks. That’s simply something that didn’t happen until 10-12 years ago, but it has been on a very limited basis until now. What is that saying about a divided house cannot stand?
So with all that said, things look great, if we can just get Mother Nature, the media and the government to cooperate. I don’t know what it says, though, when I ponder those three factors and feel I can most rely on Mother Nature.
