I routinely read at least a dozen cattle and agricultural periodicals and magazines, and many of them have recently cited the continuing decline of the US Cattle Herd numbers. Currently, the US Beef herd stands at 29 million head, which represents the smallest herd since 1962, and a decrease of .9% over the past year. While I hear many folks rattle on about “cyclical markets” and a continued decrease in beef consumption per capita, I feel most of the beef industry sages are missing the most important point…marginal cost of production.

Basic economics tells us that commodity prices are determined via the interaction between supply and demand. Currently, supply is dropping faster than overall demand. Sure, per capita beef consumption is an important metric, but it is also important to note that our population (capita) is increasing, and other supply lines (imports) have diminished, while other demand has increased (exports). In my opinion, the recent phenomena of reduced imports and increased exports will continue, as I believe we will see continued weakness in the US Dollar vs. these trading partners.

While it’s easy to get bogged down in the numerous variables affecting national beef-herd size and it’s linkage to the price of weaned calves, I have a strong belief that our national beef-herd size will not measurably increase until calf prices warrant the profitability of new entrants. I will go into detail concerning many of these factors in follow-up writings, but suffice it to say that this is a shocking statement when considering the true marginal cost of production necessary to balance the supply/demand imbalance in the cattle market.

Marginal cost of production is simply the cost to produce the next unit of something. My belief is that our current US cattle market is undergoing a structural change, whereby legacy ranching businesses and land-ownership transitions will be accelerating due to the increasing age of ranchers as we witness the final result of an exodus to the city that began almost 100 years ago. Look around your area, and note the number of rural cattle properties that have recently changed hands due to age, neglect, financial difficulties, or lack of family interest. The ugly fact is that our current cattle production system is surviving off the fumes of a system that hasn’t been profitable for some time.

I realize many will say that conventional ranching is profitable if done with a low-input bias, but I would challenge you to present a profitable cash-flow model (based on commercial market prices) that includes ALL the costs embedded in a cattle operation as compared to a typical manufacturing facility. And yes, that includes the necessary land, cattle, equipment, infrastructure, carrying costs, labor, AND the ability to get financing.

You may be scratching your head and wondering how I could be so negative about the subject of profitability in the cattle business when we are seeing all-time highs at the sale barn. Well, I guess I would say that “losing less” on a business won’t gain new entrants. On the contrary, new entrants will be attracted when it is profitable to build a cattle business net of all the necessary costs. Currently, I see folks already owning part of the “production facility” via family land, hand-me-down cattle and equipment, and other arrangements that are diminishing over time.

Recently, I completed a calculation of the marginal cost of production of a cow/calf operation in my area, which happens to be one of the most economical cattle-raising regions of the country. My analysis used a 100 cow herd, to take advantage of some economies of scale yet still make the investment reachable for some entrants. My analysis yielded a necessary liveweight sale-barn price of around $3.50-$3.75/lb in the 500-550lb weight class before it became a business worth looking at. I would suspect the national average would be closer to $4.25-$4.50/lb, which leads me to believe that we have a long way to go before we see a meaningful rush of new entrants. If this is true, it is moot to discuss the notion of pricing ourselves out of the market, as supply will continue to diminish far quicker than demand, putting producers in the cat-bird seat for once. Also, with a long lead-time before any price signal’s correction can be felt, we are likely to witness the US public’s true appetite for beef price increases. A great scenario for those already in the market running efficient operations. Even better for those running efficient operations AND efficient cattle.

I will follow with expanded articles around this subject, but wanted to present a basic overview of this concept. Hopefully this exercise will give you a glimpse of the rising tide that existing ranchers will benefit from.

Take Care,
Greg Hickl