John Harrington: Cowherd inventory & reasons for expansion
I once saw a cartoon that pictured an old man sitting in a rest home with an expression both haggard and determined. Off to one side, two nurses are quietly discussing his prospects.
“Mr. Seymour just assured me,” one informs the other, “if he makes it through February, he’s good for the rest of the year.”
Many feedlot managers, packers and traders seem to share a similarly guarded optimism in the wake of the annual cattle inventory released last Friday, Jan. 27. For some reason, they believe that if only one last market storm can be endured, blue sky and significant profit potential will quickly stretch to the far horizon.
I can certainly understand the stormy weather bit. The market front immediately on the radar is a nasty system of struggling beef cut-outs, absolutely bleak packer margins, and slipping feedlot leverage. And with more manageable supplies and any seasonal improvement in demand at least 45 to 60 days away, the worst of the storm surge could still be gathering energy.
While the short-term caution may be easy enough to understand, the longer-term optimism is a good deal more mystifying – at least if you mean by that some positive market force reasonably implied by the hard-data status and dynamics of the latest cattle herd assessment.
A friendly report? Even a bullish report?
Unless you’re prepared to go recklessly spelunking between the lines, led by nothing more than flickering lanterns of anecdotal evidence and hopeful anticipation, I think such a serious reading is simply irresponsible.
Sorry Mr. Seymour, but you’d best stay on meds and watch your step throughout the entire year.
The January 1 head count clearly stands as the latest float in a painfully long parade of liquidation. This year’s documented decline in the cowherd is the sixth in a row and 12th in the past 14 years. Since that string began in 1996, the beef cow factory has shrunk by more than 15 percent.
The only crumb of expansion promise to fall from the USDA table involved a 1 percent increase in beef replacement heifers. While the total was admittedly more constructive than the 1 percent decrease predicted by the pre-report guess, it remained pathetically modest at 5.212 million head, the second smallest in the record book.
Let me say it plainly: Further liquidation is not good news for the beef industry.
Many of you will no doubt judge such a pronouncement as less than profound. Yet I’ve read too many shallow pieces of analysis and reporting since the yearly inventory was released to assume that everyone gets the real problem.
Headlines and opening paragraphs cheering the likelihood of record cattle and beef prices through 2012 leave the false impression that such market behavior should be seen as the prized fruit of herd liquidation. But record prices will hardly be translated in terms of record profits for anyone outside the cow-calf sector.
The toxic implications of a dwindling cattle herd may be most obvious for feedlot managers and packers. These “margin players” are entirely dependent upon their ability to control an acceptable spread between input costs and revenue generated by finished goods.
If these guys lose critical leverage relative to the former (e.g., a major scarcity of feeder and slaughter cattle vis-a-vis plant capacities), the soaring ability of the latter may become largely irrelevant.
On the other hand, I’ll admit that the evils of liquidation is a tougher case to make these days before a room of wealthy ranchers who employ twin-axle armored cars each time they return from the sale barn. Who could blame them for begging to stay for one or two more dances?
Yet, weaned on a business model that winds from calf to bred heifer to finished steers, ranchers are the very last class that needs a course in long-term planning. They know the value of time and sustainability better than anyone. Accordingly, they also know the danger to infrastructure and industrial viability if cattle supply continues to slide unabated.
Believe or not, even retailers are troubled by the way beef supplies threaten to suck air if the cattle herd remains on its current path. Successful strategies at Walmart and Kroger involve more than order-taking and cost-plus merchandising. In short, the featuring and promotion of a product that only gets tougher and more expensive to stockpile is a lose-lose game.
Finally, U.S. exporters have a sinking feeling that foreign demand may be on the verge of overwhelming the country’s practical ability to supply sufficient quantities of beef. Again, higher and higher box prices may seem like hot bullish copy. But ultimately they work to make competition from the likes of Australia and Brazil (whose cattle herds are expanding) more intense.
Some of you may think that much of this represents old worries, potential dangers that have been lurking around for decades. Yet the worst impact of falling cattle numbers has long been blunted by surging gains in efficiencies like carcass weights and calving rates.
But barring a sudden success in genetic engineering that opens the door to a 1,000-pound fed steer carcass, the explosive days of making more with less are quickly drawing to a close.
If Newt could somehow move into the White House, maybe we could convince him to redirect his “moon colony” money to cattle twinning research. Neither possibility seems a good bet.
No, I think future growth in beef production, whenever it comes, will have to surface the old-fashioned way: more heifers held back, more sleepless calving seasons, more hooves on the ground.
At any rate, another mirage of cattle expansion has dissipated before our very eyes. Maybe next year. The stars of economic incentive seem to be scattered across the range just right. If only it was simply a matter of producer willpower.
Unfortunately, uncontrollable realities such as Mother Nature and the availability of labor also have a huge say in the daunting project of herd expansion. Nothing about growth is easy.
All I know is that unless U.S. cattlemen soon stumble upon a real oasis with grass tall enough for sustained herd growth, many will likely find themselves chasing record-high prices into a different business.