Cattle Today

Cattle Today

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by: Wes Ishmael

If you believe in the power of the free market economy made possible by democracy and its attendant historical sacrifices, and if you believe in encouraging the markets to remain free rather than snub them short to the post of mediocrity with artificial legislation (does the Johnson Amendment ring a bell) and false information, then this may well be the first day of the rest of your life in the cattle business that you've thirsted for.

Call it a chance alignment of lucky stars, hard won opportunity or some of both but the beef industry stands upon the threshold of a rare moment in history when the market, the nation's leadership and industry's own evolution are poised to leverage beef's future.

The Market is on Our Side

Certainly the market is on the side of cattle producers, notwithstanding some of the worst economic bleeding in the cattle feeding business earlier this year; the worst since the 70's when market legislation capsized cattle prices.

“We expect the bulk of cow/calf producers to be profitable at least through 2004. If we sustain demand growth, perhaps through 2005-2006.” That's what Randy Blach, CEO of Cattle-Fax told folks at its annual Outlook meeting in February. When you consider the spread between least and most profitable producers that's saying more than a mouthful.

More specifically, Blach and other Cattle-Fax analysts expect calf prices this year to average within $2/cwt. of last year's record average. Reasons for that include tight calf numbers and sustained demand, despite economically challenging times in this country and abroad. As well, increasing cull cow prices should boost the prospects of cow/calf profit. Blach estimates those prices to climb about $3/cwt. this year, then run about $50-$51/cwt. for the next couple of years.

After slugging their way through the highest carry-overs in history at the end of 2001, Blach also predicted profitability to return to the cattle feeding business. Obviously, equity in that sector says plenty about what calves are worth.

In a nutshell, the market and Mother Nature have conspired to extend the current cattle cycle. Economists kept expecting producers to start retaining heifers rather than sending them to town, signaling that national herd reduction had ended and cyclical herd expansion was beginning. As of February when this column was written, that still hadn't happened.

Yes, plenty of variables can change the scenery, but history has proven that cows have an amazing propensity for calving once a year, meaning that even if the industry starts retaining heifers—the fulcrum around which the cattle cycle revolves—in mass today, it's going to be tough to find so many unaccounted calves that the cycle shifts dramatically from these predictions.

The Nation's Leadership is on Our Side

“Cattle raising is not only an important part of America's past, I view it as an incredibly important part of this nation's future,” said President George W. Bush, addressing participants at this years annual meeting of the National Cattlemen's Beef Association in Denver. “Thank goodness we don't have to rely on someone else's meat to make sure our nation is healthy and well fed.”

Certainly, there is only so much a president can do, but Bush—an admitted windshield rancher with land and cattle at Crawford, Texas—left little doubt throughout his 45 minute speech that he's committed to the values and opportunities most cattle producers stand for.

“Our farm economy provides an incredible part of this nation's economic vitality,” said Bush, pegging the contribution at $1.3 trillion of the nation's Gross Domestic product in 2000. “Agriculture is the cornerstone of domestic and foreign policy.”

With that in mind, Bush informed cattle producers that he supports providing agricultural producers with an economic safety net, while letting the markets do their work, markets that include international trade.

“Our ranchers and farmers are the best in the world at what they do,” said Bush. “If that's the case, it seems logical to me that they want more opportunity to sell what they do best around the world.”

The president did ask for the help of cattle producers while he was there. “I appreciate the fact that cattlemen don't ask for much other than lower taxes,” said Bush. “To finally put the death tax to death, we need your help in telling Congress that the tax relief passed last winter must be permanent.”

So, when it comes to free markets, less government and allowing folks on the land to decide what's best for the land, the current administration supports the cattle business.

Industry Evolution is on Our Side

Finally, thanks to the hard work of cattle producers themselves, and a willingness to assume risk of the unknown, structural transition within the industry is playing a trump card on future opportunity.

At the International Livestock Congress in Houston, Larry Corah, Vice president of Supply Development for the Certified Angus Beef program opened the Beef session that aimed to answer the complexities of this simple question: How to Achieve Profitability in a Dynamic Beef Industry?

After all, especially in the last few years, the beef industry has moved faster than a roadrunner in a West Texas twister: Consolidation, concentration, vertically coordinated systems, beef product differentiation and branding, new beef product development, discovery of carcass-based genes, and on and on.

“I'm convinced that as much change as has occurred recently, we're still in the infancy of these dynamic changes,” said Corah.

For instance, while he estimates as much as 25 percent of all fed beef produced in this nation is currently marketed by brand name—10 percent of it attached to specific breeds—as quickly as 2005 at least half of all fed beef could be branded. Keep in mind, he's talking about branded beef. Already close to half of all fed beef is being marketed away from the spot cash market, making value discovery one of the most pressing challenges facing the industry today.

Today, Corah pointed out 1,775 feedlots feed 85-90 percent of all of the fed cattle in the nation—25 cattle feeding companies account for 40 percent of all fed cattle. Of the 800,000 or so cow/calf producers in the nation, about eight percent control 51 percent of the cowherd. Currently, the top five retail food chains in the United States represent 41 percent of the nation's total retail food sales—the top 10 percent account for 59 percent of sales.

Yes, that's a story of concentration and consolidation, either through acquisition or attrition. More than that, though, these statistics raise a mountain-sized neon sign on the road of the industry's future that says: “Pass here if you will collect.” In other words, producers can be for or against such things as the vertically coordinated systems and the branded beef products enabled by these systems, but the critical mass of concentration, which breeds such tools as much as they are a product of them, says these things are here to stay, will grow in force and are only the tip of the iceberg.

In many ways, what's going on in the cattle business isn't just what's going on in agriculture, it's a reflection of what's happing in business globally: reduce product variation in order to increase efficiency, and allow the differentiation and branding of products that makes expansion of market share possible.

For agriculture specifically, Corah borrowed from Purdue economist Michael Boehlse, Ph.D. to present cattle produces with five key challenges in the new agriculture of the 21st century:

*      Global competition—Much of the future price of agricultural commodities in the U.S. will be determined by our ability to access global markets.

*      Industrialization—On the production end, this will create large-scale technology-driven production units. (No, that does not mean most folks expect vertical integration through ownership in the beef industry as it has occurred in the poultry and pork industries; it speaks to the vertically coordinated systems emerging and growing in the beef industry today).

*      Differentiated products—Both livestock and crop production have transformed from the production of a commodity to the production of differentiated products. The consumer's desire for highly differentiated, safe food products will continue.

*      Precision production—The information age of the 90's has resulted in modern agriculture accessing numerous new technologies that will result in highly sophisticated production systems (arguably, the beef industry is just now scratching the surface of what's possible in coordinated systems that exploit new technologies, everything from DNA to individual animal management).

*      Formation of food supply chains—By 2020 Boehlse and his associates state that much of agricultural production will occur in an industrialized, technology-based food supply chain system. A major driver of these chains will be the need and desire to enhance human safety.

Does that mean the creativity individual producers offer the industry today, based on economic incentives and a sheer love for what they do, will be replaced by some sterile, clinical contract growing system where cattle producers are just hired guns for others who tell them what to do, what to breed and how to feed? Don't bet on it.

Rather than stealing individual opportunity, these market realities should expand the horizon for those willing to forge the future rather than tie hard and fast to the past.

“Our industry continues to be plagued by profits being achieved at the expense of another segment of the production chain instead of economic incentives provided by the total food chain,” said Corah.

The current market, the national leadership and the industry's evolution are in line to change all of that. The rest is up to us.


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