Sponsored By

When Will We Turn The Corner On Expansion?When Will We Turn The Corner On Expansion?

The symmetrical graphs of old that depicted a fairly dependable 10-year cattle cycle sure don’t seem to have that same predictability anymore.

September 17, 2010

3 Min Read
When Will We Turn The Corner On Expansion?

The symmetrical graphs of old that depicted a fairly dependable 10-year cattle cycle sure don’t seem to have that same predictability anymore.

But, certainly, there were some extenuating circumstances for this disruption in the cycle, which has now stretched for more than 14 years. For one, BSE took away our export markets and created another liquidation phase; otherwise, the industry would have been expanding in 2003 through 2005. There were also droughts. And, the impact of ethanol subsidies hit the industry as corn prices doubled. The result was that the industry was forced to get smaller to come in line with the new economic realities.

But, the impact of ethanol has never been so dramatic as what occurred the last several weeks – the rally in feeder cattle has stopped as corn moved once again above $5. What’s significant is that this nearly 25% increase in corn price came with USDA still projecting the largest crop on record, though it reduced its yield expectations.

If USDA’s expectations are realized, then corn will likely retreat some, but the bottom line is that the industry still must contract to come in line with the economic reality of ethanol subsidies. Diversified operations that raise corn have certainly experienced significant profits, and regions with accessibility to ethanol byproducts have seen their competitive position greatly enhanced over regions without such access. But, those are shifts within the industry and do little to change the overall industry outlook.

Likewise, the uncertainty surrounding the economy is keeping a lid on demand, and producers from wanting to overextend. Meanwhile, inflation concerns are causing investors to look at inflation hedges – and land and commodities have historically been great hedges against inflation. The result is that land values are on the rise, and cattle production is becoming more a byproduct of land ownership than ever before.

I was on several beautiful ranches this week, ranches with tremendous cattlemen at the helm. Yet, because of the increasing value of land, cattle production needs to be looked at in an entirely different light.

It’s not uncommon to find cattle operations with a fixed overhead from an asset standpoint of over $10,000/cow, sometimes significantly more. Just the opportunity cost alone on that money precludes cattle ownership if the goal is to make an acceptable return on total investment. The reality is that cattle are merely a way of life for producers, or a means to generate cash flow, while the land is appreciating.

The real economic model for most operations is that cows exist where land is not farmable. Cows are expected to cover direct out-of-pocket expenses, and those returns are compared against the effort and work involved to realize those profits. Additional cow units often only cost around $2,000/cow. That means it would only take $140/cow profit to create expansion.

Given the average age of producers, and the difficulty of finding labor, expansion isn’t something to take lightly. I’ve come to believe that on an industry-wide basis, producers will have to experience several years of $150/head profits or expectations of those types of profits for the foreseeable future.

Profits of $100/head used to be more than enough to spark expansion when out-of-pocket expenses were $250/cow. With energy prices, vehicle, equipment, labor and feed seemingly always increasing, the profitability figure must increase, as well. Lifestyle, recreation, hunting/fishing and entertainment value of land is now competing directly with the value of raising cattle on that land.

The bottom line is that we’ll expand, in part because we’re cattlemen and want to be cattlemen. But, expansion is likely to be much slower than in the past.

Of course, the other side of that equation is that cattlemen are aggressive folks, optimistic by nature, and love what they do; regardless of economic challenges, they’ll find a way to grow and expand. And, as I write this, I see feeders bringing record prices, bull sale prices at all-time highs, bred females selling for more, and plenty of green grass, feed and optimism relative to supply and demand. Let the good times roll!
-- Troy Marshall

Subscribe to Our Newsletters
BEEF Magazine is the source for beef production, management and market news.

You May Also Like