A Few Thoughts by John Nalivka Let the market work!

Let the beef and cattle market work!
Over the past few weeks, I have become concerned that USDA, the administration, a farm group, and now the UFCW have all thrown their suggestions into the hat regarding increasing cattle numbers to lower the price of beef. My first comment would be – prices are the result of both supply and DEMAND. Yes, U.S. cattle numbers are at a 75-year low following significant herd liquidation due to drought and negative returns to cow-calf production.
However, at the same time, we have also experienced record beef demand as consumer purchases for U.S. beef have increased significantly in response to a changed attitude toward the health benefits of beef. In addition, though beef has been pushed to record-high prices over the past two years, it is of significantly higher quality than in the past as producers pay greater attention to breeding for quality.
I understand the critical issue of capacity. I have estimated and tracked beef industry capacity for the last 4 decades – packer, feedlot, and grazing. Capacity is a critical factor that impacts margins in each of those sectors. Capacity utilization contributes to a positive margin. Underutilization of capacity is a detriment whether in the packing industry, feedlot industry, or the ranch. I have often said that it would not be wise to invest in any of the three industries and purposely not utilize the stated capacity of the business, which is a critical contributor to the value and/or purchase price. Consequently, underutilization of existing capacity for an extended period will lead to an adjustment in the capacity. And, that adjustment is also driven by the drive toward increased production efficiency through technology.
The cattle cycle describes the flow of the cattle inventory through expansion led by profitability and liquidation triggered by drought-reduced forage supplies and/or lack of profitability. Prior to the last two years, the cattle cycle never missed a beat. However, the beef industry has changed over the past 5 years, and the cattle cycle is no longer as predictable as it was in the past due to the changing demographics of building a cowherd as well as expanding an existing herd. Beef production at the cow-calf level has been more profitable over the past years than ever before. Ranchers can now go to the bank and retire debt and build longer term opportunity as opposed to building their herd and hoping the
market holds.
Let the market work and let the ranchers enjoy some prosperity for a change. The market will react if consumers decide they can no longer afford beef at today’s prices so let consumer demand continue to be the driver without outside interference.