HUNTIN' DAYLIGHT - - FIGURE OUT WHERE YOU STAND

by: Wes Ishmael

Look at any chart depicting average cow-calf profitability through the years and a thinking person has to ask the obvious questions: Why on earth would anyone be in the cattle business and how could anyone remain in the business over the long haul if they wanted to?

After all, by definition, as a commodity, producing cattle and beef is necessarily breakeven in nature. The largesse of the good years is returned during the bad years.

There are multiple answers to the obvious questions, even when assuming the reason for being in the cattle business is to make enough profit with enough return on investment, on a sustainable basis, to outweigh the opportunity costs for the resources invested. The chief reason is that folks get into and are able to remain in the cattle business is because some producers make good money most all of the time. Average breakeven profitability of the business means there are folks making lots more money than average and others losing lots more than average.

The reason such a basic economic fact merits pondering is that you can argue strongly and logically that the cattle business stands upon the threshold of irrevocable structural change. More than ever, producers still chasing elusive profits during the good times need to study how it is that other producers are able to profit during the bad times, too.

In order to do so, it pays to take a broad-brush look at industry rules of thumb that haven't held up on average. That's true even if it's a short and incomplete list of such rules. It's the process of asking questions that lead to more questions that counts.

What we thought we Knew

Grow demand enough and you grow the pie. Though part of that statement is true, even as beef demand grows domestically and internationally, U.S. producers continue to churn out more beef production per cow. The cattle cycle these days is better explained in terms of annual beef production rather than January 1 beef cow numbers. For all practical purposes, the nation's beef cowherd has been liquidating cows for 10 years. Despite growing prices and the outlook for increasing average profitability during at least the next three years—barring some other national or global economic catastrophe—collectively, the industry isn't retaining more heifers or rushing out to buy more cows. This at a time when pasture conditions nationwide are the most lush they've been in more than 10 years.

Escalating costs—narrowing margins—explains some of that. Political risk that remains off the charts is part of it. But the biggest issue is that fewer cows are needed given the expanded production.

As the number of cows required to maintain and serve demand has declined, so has the number of beef producers. There are roughly 750,000 beef cattle operations in the United States today. About 21 percent of those (155,000 with herds of 50 head or more) accounted for 72 percent of the nation's beef cow herd last year, according to the National Agricultural Statistics Service.

Corn will always be cheap. Farm policy since the late 1930's and early 1940's that fostered bountiful grain production through subsidies, helping to spawn the modern cattle business where pounds are the key driver to revenues. Between the commodity bubble two years ago, growing international demand, and growing domestic demand because of an energy policy linking corn prices to fuel, odds favor corn prices growing into the futures rather than declining.

Even this year, with the likelihood of a record or near-record crop, record demand means that corn stocks will probably decline further, adding volatility and upside price risk to corn.

Cow size and efficiency are joined at the hip. Even as growth trends in mainstream breeds have continued to increase, there has been a growing sense that herd efficiency is borne out of running more, smaller cows on a given level of resources. In fact, efficiency comes in all sizes, and there are inherent tradeoffs in operation efficiency between larger and smaller cows on average.

“The most efficient cow is the one with the highest milk potential that can, without reducing the percentage of calves successfully weaned, repeatedly produce a calf by bulls with the growth and carcass characteristics valued most in the marketplace,” explained Barry Dunn, then KRIRM Executive Director; now dean of the College of Agriculture and Biological Sciences at South Dakota State University. He and fellow researchers, Jennifer Johnson and J.D. Radakovich, presented their findings at the Cattlemen's College in January.

J.D. Radakovich added at that meeting, “As long as cow type fits within the environmental and economic guardrails of an operation, cow size has little impact on profitability,” Radakovich explains. “If you have cows that breed up in their environment and their calves can be marketed without discounts, size really doesn't make that much difference.”

Seedstock producers will embrace variation to enhance inherent breed differences. Progress in genetic selection is all about exploiting genetic variation, be it within breeds or between breeds.

Look at the genetic trends within mainstream breeds and there is no question that seedstock breeders have harnessed the tools available, for good and for bad. Angus cattle today have a mature cow size similar to Continental breeds two decades ago, for instance. One result of the race for more growth, more milk, more black color, more of most everything is that breeds have become more alike rather than more different; breed strengths and weaknesses have been diluted.

In his presentation at the recent annual Beef Improvement Federation (BIF) meeting, Matt Spangler, extension beef genetics specialist at the University of Nebraska pointed out, “Steep increasing genetic trends for growth traits (weaning and yearling) and mature cow weight can be seen in many breeds, but perhaps more alarming are those producers that have dramatically increased the genetic potential for milk production in their cow herds. Conditional on the assumption that the beef cattle industry is a for-profit organization, then it would seem logical that profit (Revenue – Expense) should drive our selection decisions. In order to actually do this, knowledge of environmental constraints, genetic antagonisms, and the selection tools that have the potential to measure profit are critical.”

That's the rub. As an industry, so far most of the research and measurements have focused on output rather than input.

Producers will embrace crossbreeding to increase returns and decrease risk. As a hedge against the hard-to-measure, at least three decades ago it seemed logical to assume that crossbreeding in general and managing maternal heterosis, specifically, would become the industry norm. Though crossbreeding is more complex, the comparative advantages it offers in output, but especially on the input side of the ledge, have meant it couldn't be ignored. At least that was the theory.

Meander through the survey conducted by BEEF Magazine and the reality is that the nation's commercial herd is predominately English—mostly straight-bred—the most recent bull purchased by commercial producers responding to the survey was Angus. According to the survey, the majority of these producers have no intention to change the genetic makeup of their herd within the next five years. Angus was the last breed of bulls purchased by 66 percent of the respondents, followed by Hereford at 12 percent.

All of that merely reaffirms what you see in similar surveys by other organizations and as you drive across the country or through feedlots.

“At a BIF meeting in 2010, it hardly seems fit to even mention crossbreeding. Commercial producers who have not yet adopted it are a burden to the beef industry,” Spangler said. “However, it (crossbreeding) is an excellent example of selection for profitability. We know that the two primary benefits of crossbreeding are complementing the strengths of two or more breeds and heterosis, neither of which create trait maximums. If we think about it simplistically, crossbreeding for a trait like weaning weight leaves us with a calf crop that is better than the average of the parental lines, not better than both parental lines. Crossbreeding, if done correctly, seeks to optimize many traits through complementing breed strengths and produce animals that are better than the average of the parental lines that created them. The best tool that the commercial cattleman ever had is based on optimization, not the production of extremes. So, it would stand to reason that within breed selection should have the same goal, optimums and not maximums.”

Beating the Average

Individual producers cannot change the price of corn or alter the macroeconomic trends facing the business. What individual producers can do is employ available tools accurately and cost-effectively in order to grow their own profit.

Arguably, that's why the cattle business continues to be such a good business for some. Take a look at the largest, most successful commercial operations and you'll find crossbreeding is the standard rather than the exception as they exploit maternal heterosis to increase production, but mostly in order to reduce cost. Rather than focus on pounds, they focus on the cost per pound of production, relative to the possible revenue per pound.

These operations know what breeding system to use, what breeds, what bulls within breed and so on because they understand how well and how poorly their herd performs relative to regional and national benchmarks for meaningful business profit measures.

The folks in this group are usually the ones who have participated in some sort of Standardized Performance Analysis program, on their own with consultants, or as part of organized industry groups working with consultants.

For them, bull selection isn't about getting cows bred, or necessarily even about the marketability or retainability of the steers and heifers sired by that bull. For them, genetic selection is about solutions, using bulls with the cowherds they've built in order to solve the profit equation, at least as much relative to expenses as for production. They're among the group that makes money, even in those bad years of average industry profitability.







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