A Few Thoughts by John Nalivka: The bigger culprit impacting ranchers – energy or packers
Costs of production across agriculture have increased significantly over the past 18 months leading many to look for someone to blame. Many in the cattle industry have reached the conclusion that the packer fits the bill and consequently, there has been a great deal of discussion and ultimately, investigations regarding concentration in the beef packing industry over the past 2 years with the generally agreed-upon-conclusion that the industry lacks competition and the remedy is to increase capacity. And, the government will help to fund that capacity expansion. Imagine that?
Capacity is a critical issue in economics as it not only impacts the cost of inputs through competition for those inputs but also the price of the products produced via supply. I have written often that as cattle numbers shrink as the result of herd liquidation this year, prices will strengthen as competition for those tighter cattle numbers increases. The market has already strengthened this year and we have not yet felt the impact of herd liquidation. Today’s higher prices for feeder cattle and calves is in anticipation of impending tighter supply. Enough of the textbook stuff. Getting back to costs of production, the two inputs having the greatest impact on costs across the entire supply chain are labor and energy and these higher supply chain costs have an impact as well. So, let’s shift our focus to one of those primary input costs – oil refinery capacity.
U.S. oil companies currently operate 130 refineries with the capacity to process 17.9 million barrels per day, down 1 million barrels per day from 2020. Utilization of that capacity is currently running at 94% compared to a 2020-2021 average of 83%. The pre-COVID 2015-2019 average was 91%. The price of oil has averaged $102 / bbl. through the end of June this year. The average price for 2020-2021 was $53.62 per bbl.
Looking back further, there were 175 U.S. oil refineries in 1995 with processing capacity of 15.1 million bbls. per day. Oil averaged $18.96 per bbl. that year.
This inflationary situation is not complicated and it is solvable. Energy costs are the most significant driver to inflation across the beef supply chain – gasoline at the pump for consumers and diesel on for production and distribution. The solution is also not complicated. We need to increase oil production with U.S. drilling, process that oil through increased U.S. refinery capacity, and thus, increase the supply of gasoline and diesel. I am convinced that the time and energy spent by cattlemen to promote oil refining capacity and utilization in a unified effort would be of much greater economic benefit to the industry than investigating packers.
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