BROKEN CATTLE CYCLE

Hughes says know your unit cost of production, benchmark to find strengths & weaknesses

Wheatland – A year ago corn prices were the talk of the cattle industry. The same is true today, but there’s an accompanying question – What are we going to do about it?
    Producers who’ve before relied on the cattle cycle for decision-making are going to need a new plan, according to North Dakota State University Professor Emeritus Harlan Hughes. He predicts corn prices will stay high at least through this decade and probably longer. Like some other economists he also says the cattle cycle is broken. “Those past waves in the cattle cycle, that’s not going to happen again for a while,” says Hughes.
    Breaking at an optimum time, he says, “If we’re going to break the cattle cycle, break it at the bottom because prices are high and numbers are low. Ranchers are in the driver’s seat.”
     While feeders and packers are losing money, Hughes says, “I’m still predicting profit in the cow-calf sector.” He quickly adds a disclaimer noting the statement applies to those who closely watch their Unit Cost of Production, a term Hughes is known for. UCOP is what it costs to produce a hundred pounds of beef. For ranchers it equates to their “break-even” point.
    “Remember the difference between ‘demand driven’ and ‘supply driven,’” advises Hughes. “We need to understand there is a different reason behind this run-up in corn prices. It’s due to increased demand, not short supply.” Of producers who contact him asking when corn prices are going to go back down and if cow prices are to follow, he laughs, “They get a long reply e-mail.”
    “This is a different ball game than we’ve ever experienced,” says Hughes. “Some of our past experiences are not going to guide us real well.”
    Looking back to 1996 when corn prices spiked in the wake of a crop failure, Hughes says when the new corn crop came in back in 1997 cattle prices recovered. There’s no corrective counterpart waiting in the wings for today’s cattle industry. Depending on which segment of the agricultural industry one’s in, conditions may even get tighter.
    “I think we’re going to see cattle numbers slowly go down as the farmer ranchers east of here get out of the cow business,” says Harlan of pasture lands being converted to fuel crops. “Farmers are going to farm fencerow to fencerow.”
    “I think we’re one short corn crop away from a crop failure. We have no corn reserves. Most of you have operated most or all of your ranching life in an era where we’ve had corn reserves,” says Hughes. “We always knew that if corn prices got too high we’d pull it out of storage.” Today there is no corn in storage, private or federally held. He believes, because of lacking protections, the cattle industry will feel the economic ramifications of a corn shortage before the corn farmers feel it.
    “Last year we averaged $92 in the fed market for the year,” says Hughes, noting he believes prices could reach $93-94 over the course of the year to come. “There’s some debate about what’s going to happen this year. As of January of this year feedlots were losing about $150 a head in the feedlot. We can’t keep that kind of performance up.”
    “The processing sector, which we have to have, is going through an economic struggle,” says Hughes. “Obviously, the packing sector is going to increase concentration. That’s the wrong direction as to what we as an industry have wanted it to do, but economics are dictating it.”
    “The feedlot sector has probably got to consolidate,” he predicts. “It’s probably going to be the low cost, most efficient big feedlots that are going to make it. The smaller, inefficient lots probably aren’t going to make it. The smaller, efficient lot can probably continue to compete, although it’s less clear on this last statement.”
    Making money in the cow-calf sector, according to Hughes, will hinge on being the low cost producer. “There’s a huge difference between the low and high cost producers,” he comments. He says when people call him and ask him how the industry is doing he asks them if they want to know about the low cost producers, the high cost producers or the average.
    “Beyond the ranch gate we’ve got excess capacity. To fill that capacity they’re going to overbid at the ranch gate as long as they have equity capital,” says Hughes.
    “I’m still showing profits in the beef cow sector if you sell at weaning,” says Hughes. “I am not showing any profits beyond weaning for 2007 and 2008. I am not a supporter of retained ownership on the majority of ranches. I just go by what the numbers tell me.”
    “I think intensively managed herds are going to continue to make a profit in this new biofuels era and they’ll do that through herd performance records and profit center accounting,” says Hughes. That means know what it costs you to produce a pound of beef, know how that compares to the region’s best ranchers and set goals to reduce your own costs.
    Profit center accounting involves keeping the economics of a cow-calf operation separate from, for example, a stocker operation. Hughes says it allows one to better evaluate where they’re making money and where they’re losing money. “I wonder how often we have the wrong numbers for a profit center and make decisions on them?” he asks.
    “To manage it you have to measure it,” says Hughes. “If you don’t measure it, don’t try and tell me you’re managing for it. If you don’t know which way costs are going, how do you know how to manage them?”
    “The kinds of actions you take from now on to adjust to the biofuel era depend on if you’re a low, medium or high cost producer,” says Hughes. Low cost producers he advises to re-stock when grass becomes available. For high cost producers, he says, “Get better before you get bigger. If you’re losing money on the first hundred cows you have, you’re probably going to lose money on the second hundred cows you have.”
    A computer CD video of Hughes’ “Managing In A Changing Corn Environment” is available for $25 by sending a check to Western Edge Consulting, 30 Ramble A Road, Laramie, WY 82070. He can be e-mailed at harlan.hughes@gte.net. Jennifer Womack is editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.