Finding Profitability in a Volatile Cattle Market

February 2, 2012 08:05 PM
 

There’s no question that unprecedented volatility in commodity markets and the increasing influence of external factors, both domestic and abroad, are changing how cattle producers do business in the cattle market. Nevil Speer, PhD, Western Kentucky University, elaborated on this topic during the Cattlemen’s College at the 2012 Cattle Industry Convention and National Cattlemen's Beef Association Trade Show.

Between 1980-1998, Speer noted that pork and poultry expenditures increased by over $112.43 per capita, while beef expenditures increased only $6.07 per capita. This along with the relatively flat, slow-to-increase annual average cattle price through the 80s and 90s made for slow growth for the cattle industry during that time.

Since January of 2010 the cattle business has experienced both extreme growth and volatility. This can be seen in the increase of aggregate feedyard revenue ($ bil) from nearly $17 billion in 1998 to over $30 million in 2011. In December of 2009 fed markets were at a near term low. Fast forward two years later and fed cattle are currently being traded at $125, which is nearly a 55% increase. The fed markets are currently out competing the S&P 500 stock index which only increases around 40+% over that same two year period.

As Speer put it, "We are in a dark wood and the way is not straight." The road ahead for the cattle business is an uncertain one, but also a very promising one if producers are willing to listen to market signals and become more disciplined, objective, and innovative business strategists. Producers can view the current environment as one of danger or one of opportunity. What they decide could likely affect the future of their business.

In the domestic beef market, Speer sees value continuing to dominate consumer concerns. However, where Speer sees the real growth for the US cattle industry is in the export market. From 2009 to 2010, beef export values have increased in value by over $40/head. Beef exports have also added an additional $15-20/cwt to the fed market. Export values for 2011 are on track to surpass 2010 annual export value by 30+%.

Though it is uncertain when the ongoing liquidation of the cowherd will end, Speer sees a trend for cattle operations to get bigger. Currently about 4% of the cattle operations in the US run 200+ cows, yet they control over 37% of the cow inventory. Speer noted that the overall decline in cattle operations since 1992 was about 160,000, with the majority (92%) of these operations running 50 or less head of cattle. One point to note is, though our cow inventory may be smaller compared to over 15 years ago, when the cow inventory is adjusted for the increase in steer carcass weights, we are nearly equal in cow numbers (1995 – 35.19 mil head, 2011 – 34.897 mil head).

So what’s the bottom line here? Higher commodity prices have impacted the cattle industry in a number of ways. For many cattle producers, this means an alteration in the capital requirements to maintain a business. Overall, the cattle industry is an optimistic group and will do their best to strive ahead in these new market challenges. In the future Speer foresees commercial producers getting bigger to adjust to the larger economies of scale and also payer closer attention to market signals. He believes this will also shift a greater focus to technology, value, and contracts. Into the future, cattlemen will become more business oriented, spending more time on purchasing vs. marketing decisions.

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