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Maybe the reason yesterday often seems a bit brighter than today
is because wounds inflicted then have scarred over. At least
that makes sense in the cattle business.
Maybe the reason that
makes sense in the cattle business is because, no matter how you
paint it, cattle and beef remain commodity businesses, subject
to commodity principles. Chief among these is the fact that over
time, prices and production costs will always be about the same.
Consider the situation near the end of the last century; cattle
economics were in dire straits, as was the rest of agriculture.
Heading into the
1980s, health concerns about beef surfaced—cholesterol,
specifically—and the growing number of two-wage households had
less time for cooking, so convenience began to become more of a
focus. In other words, beef demand was running south.
At the time, Wayne
Purcell, esteemed agricultural economist with Virginia Tech
pointed out inflation-adjusted beef prices plummeted more than
30% (between 1979 and 1986) as consumers turned away from fresh
beef. The debacle through most of the 1990’s was the most
nightmarish demand curve possible—consumers willing to spend
only less for less beef.
This was occurring as global agricultural production (all
commodities collectively) continued to drive commodity prices
lower. Net farm income - adjusted for inflation - plummeted 21%
between 1990 and 1998, according to USDA numbers. During the
same period, adjusted for inflation, corn prices dropped 32.9%,
yet calf prices fell 33.9%.
Depending on who
you talked with at the time, estimates had the beef industry
losing about $4.5 billion in equity from 1994 to1998, compared
to about $3.5 billion worth of equity lost during the economic
cataclysm of the 70’s.
If you had a chance
to lose money that far back, then you’ll remember that the
1970’s had to do with a government price-freeze on beef prices,
along with rising inflation and interest rates. Anticipated
increases in demand drove up land prices and the equity needed
to borrow more money. When overproduction and weakening export
demand conspired to crash commodity prices, the bottom dropped
out of land values and highly leveraged producers got buried.
A decade or so later it was global economic crises, record
global production and a strong U.S. dollar driving down exports
and commodity prices.
When beef demand
finally shifted up, it had to do with lots of things. Among
them, the nation’s economy began steaming along; consumer
concerns about beef healthfulness lessened, in no small measure
because of check-off funded educational efforts. And, the
industry became more focused on consistency and developing more
convenient products, also funded heavily with check-off dollars.
As recently as
2002, though, before the current sustained period of best-chance
profitability—the markets served up a few more lumps. That year
began on the heels of historically high feeder prices and
spreads between feeder and fed cattle. A common notion at the
time was that cyclical liquidation was ending, which also
promised fewer cattle numbers to place, so more price support.
By April, the markets had crumpled: higher placements than
expected; fed prices $10/cwt. lower than anticipated; live
cattle futures losing $10 in 30 days; allegations of market
manipulation, and on and on.
Throw in 9-11 and
an FMD scare at a Kansas sale barn a year earlier and market
psychology was shakier than a dried out wino in an earthquake.
In 2002 Cattle-Fax estimated cattle feeders lost $1.14 billion
in equity from October to mid April and a net loss of $2.6
billion over the past five years.
Expansion that Never Comes
Since then, supply—fewer numbers of cattle—has wrapped its arms
around cow-calf producers and cushioned what could have been the
tragic economic blows of BSE a few years ago, and most recently
escalating corn prices that would have normally pressured calf
prices more than they have.
Apparently this
will remain a saving grace for at least a couple of more years.
The 104.8 million
head reported July 1 is about 400,000 head shy of last year, but
still about 1% higher than the inventory two years ago. Though
the beef cow number (33.35 million) was slightly lower than the
33.45 million reported in 2006, beef replacement heifers posted
a fair decrease of 6% (4.7 million) compared to last year.
“These inventory
numbers mean that cattle markets will enjoy relatively tight
supply conditions that support prices, not only for the
remainder of 2007 but also for 2008 and very likely for 2009 as
well,” says Derrell Peel, Oklahoma State University Extension
livestock marketing specialist. “It is possible that herd
expansion could pick up slightly in the second half of the year
but it would be difficult to see much, if any, increase in herd
numbers going into 2008... My sense is that even in areas where
forage conditions are good, there is considerable caution on the
part of cow-calf producers.”
According to the
Livestock Marketing Information Center total U.S. commercial
cattle slaughter in 2007 is expected to be just fewer than 33.9
million head, up about 200,000 head from a year ago. “Much of
the yearly increase in slaughter will come from cows and
heifers,” say analysts there. “U.S. slaughter is forecast to
decline about 1 percent in 2008. The supply of cattle and beef
will be supportive of cattle prices for the balance of 2007 and
at least throughout 2009. Looking ahead, most of the price
surprises, positive and negative, will come from the demand
side. From a cattle and beef perspective, those demand factors
are underpinned by overall U.S. domestic economic conditions,
foreign demand for beef and by-products, and competition from
other meats and poultry.”
“I still view this
as an interruption of the cattle cycle but it appears likely
that expansion will proceed slowly in the next two to four
years,” says Peel. “Meanwhile, limited cattle supplies will keep
cattle prices generally strong, albeit with considerable
potential for short-term volatility. At some point, supplies
will be further squeezed when producers begin retaining heifers
to expand the cow herd.”
Certainly, robust consumer beef demand that began growing in
1999 has offered its share of price protection, too. Imagine
what the past few years would have been like with pre-1999 beef
demand.
So, between tight supplies and solid demand, cattle prices are
record high, as is agricultural income overall, yet few
producers feel like they’re drowning in greenbacks. Input costs
are the chief cause of these butterflies.
According to
estimates from the Food and Agricultural Policy Research
Institute (FAPRI), estimated feed costs (for all livestock) for
this year will be up 22.4% compared to last, while net cow-calf
returns are projected to decline 45.2% to $42.70/cow. Prospects
deteriorate steeply from there. FAPRI pegs net cow-calf returns
at $9.40/cow next year and then -$11.91 to -$47.92 until
breakeven levels return in 2014. Keep in mind, part of the FAPRI
assumptions include more traditional cyclical cowherd expansion.
At the risk of
being a sad-sack, this past decade or so serves as a salient
reminder about the break-even vagaries of a commodity business,
and the fact that the cattle business still is one, despite the
ability of some to exploit value-added opportunities. If that
wasn’t so, then industry attrition would make no sense.
There were 763,000
beef operations January 1 this year—855,860 in 1998 (894,890 in
1993).
That’s one reason why the end of the 1990’s saw such a push
toward differentiating commodity product, often via coordinated
alliances between production segments. The idea behind it was
the fact that some beef is worth more than commodity price,
relative to a particular promise (brand) to the consumer.
Alliances, grid pricing and all of the rest emerged as ways to
aggregate cattle that would fit the narrower specification of
these value-added markets. We’ll discuss this evolution in more
detail next month. |
