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HUNTIN' DAYLIGHT -- THE COLLECTIVE WISDOM IS OPTIMISTIC

by: Wes Ishmael

If you believe in experience and the wisdom wrought by it, then now is no time to panic in the cattle business. It's just a matter of navigating the rough economic stretch for the next year or so.

That notion is supported by cowboy barometers like bull sales this spring, which have held up admirably steady on average. Collectively, commercial cow-calf producers are indicating through bull purchase prices that they expect profit margins to be wider and more positive than they are today. That's 18 to 36 months down the road when the first calves from these bulls go to market—or the first calves from replacements sired by them.

Then there's the future's market, at least a cowboy barometer by association. Love it or hate it, rue the speculators that provide liquidity and the opportunity to lay off risk or love them; it's a solid barometer for market direction, especially when you look beyond the next minute or the next month. The deferred contracts for both live cattle and feeders are no run-away, but they indicate all involved expect cattle to be worth more rather than less, even as domestic and global consumer demand fades the vagaries of economic recession.

Optimism is also based on hard-core economic analysis.

In February, the USDA Economic Research Service issued its Agricultural Projections to 2018. Plenty of assumptions are necessarily part of such a long-range forecast, but the logic behind the conclusions makes a world of sense.

According to the report, “The ongoing world economic slowdown underpins a retreat in global consumption, trade, and prices in the near term, reducing the U.S. agricultural trade value and farm income from 2008 levels. However, once global economies recover, steady domestic and international economic growth supports gains in the U.S. agricultural sector. In addition, long-run developments reflect continued demand for agricultural commodities for the production of bio-fuels. Thus, after declining in the near term, farm income and U.S. agricultural trade grow through the rest of the projection period. Retail food prices rise faster than the general inflation rate through 2011, partly reflecting higher meat prices due to livestock sector adjustments to increased feed costs.”

Specific to the cattle business, the USDA report concludes, “Higher grain prices as well as effects of drought on pasture conditions in recent years hold down cattle inventories, pushing U.S. beef production down in 2009-12. Production then rises in the remainder of the projection period as returns improve and herds are rebuilt. The total cattle inventory drops below 94 million head before expanding to about 97 million at the end of the projection period.”

That's 97 million head in 2018. That's the same cattle inventory as it was January 1, 2007. Considering that the January 1 inventory this year was 94.5 million, we're talking one flat cycle.

“Increasing livestock prices over the first half of the projection period result from lower production as the sector adjusts to higher feed costs. Once the production adjustments have occurred, prices level off at a new higher plane,” predict the analysts.

On the other side of the ledger, the folks at USDA say, “Feed expenses, which rose rapidly in recent years with higher corn prices, decline over the next several years as corn prices retreat and the livestock sector is reduced. Moderate increases in feed expenses are then projected as the livestock sector resumes growth.”

Combined, the long-term outlook projects relatively stable cash operating margins at 75-77 percent as cash receipts and gross cash income rise at close to the same pace as cash expenses.

“Net farm income declines in the near term from the high levels of 2007 and 2008, but remains historically strong and rebounds to near-record levels by the end of the projections,” says the report.

Among other highlights:

• “Even with higher meat prices and near term recession in the United States, rising U.S. incomes over most of the next decade facilitate gains in consumer spending on meat. Continuing a long-term trend, overall meat expenditures represent a declining proportion of disposable income.”

• “With higher prices, government payments have a smaller role in the agricultural sector's income. Government payments, which represented more than eight percent of gross cash income in 2005, account for less than three percent during most of the projection period. Conversely, the sector relies on the market for more of its income. Cash receipts plus farm-related income rise to over 97 percent of gross cash income.”

• “The value of U.S. agricultural exports declines over the next two years from the peak reached in fiscal year 2008, but then rises through the remainder of the projections due to increases in both export volumes and prices. A resumption of domestic economic growth boosts U.S. agricultural imports.”

• “High prices for agricultural commodities and energy contributed to U.S. consumer food prices rising more than the general inflation rate in 2008. Retail food prices continue to rise faster than overall inflation through 2011, partly reflecting higher meat prices (particularly in 2010 and 2011) as the livestock sector adjusts to increased feed costs. Then consumer food prices in the United States return to the longer term relationship of rising less than the general inflation rate over the remainder of the projection period.”

• “The growth in world per capita meat consumption slows during the coming decade to about a third of a percent per year. Still, meat shipments from major exporters trend upwards at 1.3 percent per year. Growth rates of exports from major exporters of beef, pork, and poultry meat average 1.4 percent, 1.7 percent, and 0.9 percent per year, respectively, between 2009 and 2018. During this period, exports rise 0.9 million tons for beef, 0.9 million for pork, and 0.7 million for poultry. Rising per capita incomes combined with population growth in a number of countries are the driving forces behind the projected growth in global meat demand.”

How the Crowd Sees It

Together, the cowboy math and formal analysis also represent a crowd weighing in on the economic outlook, a crowd which should have more wisdom in aggregate than each individual can have alone.

A few years back, a fellow by the name of James Surowiecki authored a book entitled The Wisdom of Crowds. In the most basic of terms he pointed out that the average of lots of individuals answering a common question can more accurate than a single stab taken by the most astute individual.

There are limitations to this, but closer to home it's akin to usually being able to estimate the average weight of a pen of calves more correctly than guessing the weight of a single steer.

Edward Vul and Harold Pashler researchers at the Massachusetts Institute of Technology and the University of California-San Diego, respectively, took Surowiecki's notion of crowd intelligence a step further. They examined whether or not the average of two answers from the same individual is more or less accurate than either of two answers alone. Turns out, the average is more accurate.

“Although people assume that their first guess about a matter of fact exhausts the best information available to them, a forced second guess contributes additional information, such that the average of two guesses is better than either guess alone,” say Vul and Pashler. “This observed benefit of averaging multiple responses from the same person suggests that responses made by a subject are sampled from an internal probability distribution, rather than deterministically selected on the basis of all the knowledge a subject has.”

That poses plenty to ponder when it comes to making and testing decisions at home. No matter how you slice it, though, there's plenty of reason to see growing opportunity in the cattle business once we emerge from the current economic mess.

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