Cattle at the Crossroads
Random thoughts while wondering who will be the cattle-persons of the 21st century?
As we wind down the liquidation phase of the current cattle cycle, market values of beef cattle are at all time lows in terms of real or inflation adjusted prices. The low calf prices of 1995 and 1996 are the culmination of: 1) continued weakness in beef demand that began in and around 1979 and 1980; 2) the large cyclical increase in beef production during 1995 and 1996; 3) the surge in corn prices to record levels after a short crop in 1995; and 4) drought in both the southwestern cow-calf regions and the southern plains wheat pasture country.
Per-capita offerings of beef have plunged from near 95 pounds in 1976 to near 65 pounds in the 1990's, a 31% decrease. In Oklahoma and Texas the number of cow-calf producers declined 11% from 1978 to 1992 (from 183,477 to 162,843 producers).
During the same time period, the average beef cow herd in Texas and Oklahoma increased from 40 to 42 cows. While things have remained pretty much the same 'own on the ranch' during the last twenty years, changes have been dramatic in the feedlot and packing segments of the cattle industry. Cattle feeding has consolidated to the point that 1100 feedlots feed 88% of all cattle and 212 large lots feed 60% of the approximately 28 million head fed each year.
Consolidation in the beef packing segment has been even more dramatic with the top four firms accounting for 81% of total slaughter and the top three firms 75%. To complicate matters for the average cow-calf producer, the local infrastructure (sale barns and input suppliers) to support cattle production is disappearing in many communities.
Economics have dictated the massive consolidation in both the feeding and packing segments of the cattle industry. There are tremendous economy of scale benefits for large packing plants and large multi-plant packing firms. Economic efficiencies also make large feedlots more cost competitive than the small farmer-feeder lots they have largely replaced. And economics, I will argue, are responsible for the survivability of the 20 to 50 head cow herds.
These size cow herds lend themselves well to being part-time enterprises - whether they are part time on a crop farm, a stockerfeeder operation, or as a retirement or after work activity. The same pickup that serves as the second family vehicle can handle the hauling needs of 20 to 50 cows. One person with only occasional, if any, additional help can care for 20 to 50 cows. And in most locales from 50 to 400 acres will provide most, if not all, the forage needed to sustain 20 to 50 cows. Increasingly, in southern Oklahoma and north Texas, these size tracts are becoming home sites for retirees, commuters, and investors (who plan to live on a tract for 10 to 15 years and then subdivide it).
For the cattle industry to prosper into the new century, radical changes must be made in the pricing system to ensure that the vertically related stages along the production-marketing chain convey the proper signals from the consumer back down to the primary producer (cow-calf segment). Improved communication is needed to enhance price discovery and enable coordination between the stages of the production-marketing chain and ultimately improve the demand for beef. The proper signals are needed both to coordinate production and to increase consumer satisfaction / demand.
Currently, the system is failing in both these areas. For all the talk about value based marketing, there is little, if any, effective pricing to value. The captive supply phenomena is the response of large packers' strong incentive to purchase in volume and perform cost accounting on a per head basis coupled with large feeders' attempts to achieve some degree of value based marketing. In this regard one man's value based marketing agreement is another man's captive supply problem!
Thought for the month: "It's all very well in practice, but it will never work in theory." - French management saying