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Management

Producing In ‘The Golden Age’

Written by John Ritten

By John Ritten,  UW Extension Economist

It seems like every generation has at least one taste of the elusive “golden age” of agriculture. However, too often producers don’t plan well, and when the bubble bursts, many businesses are stricken with too much debt and not a good long-term plan.  

There is a lot of discussion, and some worry, about how high and how long we will see current cattle prices. Nobody wants to miss a big payoff, but a lot of people are wary about gambling too much.  I wish I had a crystal ball to help show what to expect in the coming years, but unfortunately I don’t. 

And while the “fundamentals” everyone relies on to forecast market movements appear to be less fundamental than they have in the past, there are a few important considerations when making your expectations for the coming years.

2015 will likely be a good year for cattle producers. However, I don’t think it will be quite as good as 2014. One main reason is we will see increased competition from the other major meats.  

With year-end reports coming in, last year likely saw the lowest beef production in over 20 years.  Also, last year looks to have the second highest amount of exports on record. This led to the lowest amount of beef produced per capita in over 50 years. The tight supply of beef partially supported record prices at all levels of the industry.  

However, we also have to thank pork and chicken for their help, as well.  The other major meats also saw declines in production last year. There was less total meat to be consumed, so prices rose across the board.  

While cattle producers have begun rebuilding, it is a time consuming process. Both pork and chicken production will likely see major year-over-year increases in 2015, but beef production will lag for a few years. Increased production for the other meats means that while cattle prices are forecast to remain elevated, the prices of competing products will decrease. 

For example, projections are for hog prices to be up to 15 percent lower next year than they were this year. At some point, if beef prices don’t relax somewhat, consumers will be forced to examine cheaper substitutes.

One market impact that is difficult to determine right now is what the strengthening dollar will do to cattle prices.  One reason it is difficult to determine total impact is that a stronger dollar tends to impact domestic and global demand differently.  

A stronger dollar will likely lead to lower exports, and with fewer bidders for beef, prices will be negatively impacted.  

However, the stronger dollar has also been partially credited with the recent decrease in oil prices.  With the corresponding fall in gasoline prices, domestic consumers see more money in their monthly budget, and increased disposable income tends to strengthen demand for products like beef.  

Will the negative impacts of lowered global demand be offset by increased domestic demand? It is hard to tell at this point.  The longer fuel prices remain low, the better the market will be for beef.

While I don’t have a crystal ball, I am confident that cattle prices will recede at some point. I hope that doesn’t happen for a while. When it does happen, we hope that prices decline due to the market “fundamentals,” as increased supply pushes prices down the demand curve, which would result in at least a few years of sustained cattle prices. 

There are a lot of unknowns out there that can have dramatic impacts on the cattle market, so I wouldn’t rely on high cattle prices in the coming years as the long-term plan to make your operation profitable. Make sure you utilize your current situation wisely. If there are investment opportunities that provide either increased profitability or reduced costs, either in the present or in the future, now is a good time to put some money back into your business.  

Long-term investments, such as range improvements or water development, may be easier to finance now than any time in the past. However, if you are simply looking for ways to spend money to decrease your tax bill, I would suggest that might not be the best strategy.  

It isn’t hard to find anyone that has lived through one of the previous “golden ages” who doesn’t wish they would have managed their finances better when times were good. If you’re in business now, you know how to get through the lean years, but many of us have more problems dealing with the good years since we have less experience with those.  

If you have extra cash, there are worse things than saving it for the next rainy day, or as is often our case, the next drought year.