Greg Lardy: Industry dynamics in a new era
Ryan Summerlin May 25, 2012
The beef cattle industry has been in contraction mode for several years. Cow numbers have declined steadily since about 2004 and are currently at numbers not seen since the 1950s.
The rapid increase in cost of production, an aging producer population, and land use competition (development, cropping pressure, lifestyle choices) are among the factors driving this drop. Understanding the dynamics of change taking place is important in order for producers to effectively position their operation for maximum profitability now and in the future.
This spring semester, I taught the beef production section of the sophomore-level livestock production course at North Dakota State University (NDSU). This forced me to study the industry-wide economic situation a bit more closely than I had in the past couple of years.
It was rather startling to prepare a lecture on marketing and economics and have the students calculate the cost of gain for a typical feedlot scenario using today’s feed prices. In the early to mid-2000s, we routinely discussed feedlot costs of gain in the $40 per hundredweight range. This year, we discussed feedlot costs of gain that ranged from $90 to $100 per hundredweight (based on $6.30 per bushel corn)!
Corn prices have steadily climbed from a low of about $2 per bushel in 2002 to over $7 per bushel in 2012. This increase was a result of increasing fossil fuel prices coupled with government mandates for ethanol production, which in turn lead to increases in acres allotted to corn production. An increasing worldwide demand for agricultural commodities has also played a part in the switch to major commodity crops such as corn and soybeans.
All of this has resulted in land being taken out of production of perennial forages, native rangelands, and hay in favor of more profitable annual crops. This ultimately led to sharply higher production costs for the beef industry.
Many producers are exiting the beef cattle business due to advancing age, lifestyle choices and other factors. While some of their cowherds are dispersed and incorporated into other cowherds in the area, many have been eliminated, contributing to the overall decline in cow numbers.
Last year’s drought in Texas, Oklahoma and New Mexico obviously contributed to this; but cow culling has been a steady occurrence in other regions of the country as well. In our region, continued pressure from land use competition is a significant factor in declining in cow numbers.
Many have asked why we have not seen significant herd expansion in the past two years as prices for feeder cattle are at or near record levels. The simple answer is that the economics do not justify major increases in heifer retention or cowherd expansion for the majority of industry participants.
Obviously, the situation is much more complex than that simple answer. Each individual situation is different. Some operations have limited resources, such as available pasture or labor; others are constrained by finances or lifestyle choices. However, on average, even with higher feeder cattle prices, the relative economics have not resulted in a desire in the industry to expand. Significant increases in costs for feed, fuel and other inputs have resulted in a situation where the margins, up to this point, have not stimulated a signal for industry-wide expansion.
When that signal is ultimately reached, it will be an interesting time in the industry. It will mean higher heifer retention, lower numbers of available feeder cattle, and increased competition for available cattle by feedlots. This will come at a time when feedlot occupancy is already low and available packing capacity is high. The result will be the potential for poor economic conditions in both the feedlot and packing sector. Profitability may not return to these sectors of the industry without significant increases in supply and/or reduction in capacity. It will definitely be interesting to watch this scenario play out over the next three to five years!
Now is the time to prepare your operation to deal with the higher costs, increased price volatility and opportunities which will come from changes which will occur in the future. It will be an exciting time in the beef industry!