Rebuilding the cow herd requires a cycle of producers as well as cows

Derrell Peel, Oklahoma State University Extension

Much has been written in recent months about the need to rebuild the beef
cow herd and why it taking so long to jumpstart herd expansion this time.
While the general economic signals for expansion seem to be in place, there
are a variety of structural factors at work as well. Of course, the
question is moot for 2011 as the drought in the south will trump cyclical
expansion signals in other regions and ensure additional herd liquidation.
However, at some point, the question of what it takes to rebuild the herd
will emerge once again.

By itself, a cattle cycle operates mostly on expectations of profitability
and historically that has meant that cycles of cattle prices were the
principal drivers of herd expansion and contraction. Cattle prices are
historically high but that is not enough to spark herd expansion because it
has not yet translated into to widespread expectations of sufficient
profitability to warrant heifer retention. For some producers this is the
result of skepticism about how long high cattle prices will last. It is
also suggested that increased input costs means that profitability is not
yet high enough to support herd expansion. Efficient producers with
relatively low costs appear to be amply profitable now but high cost
producers, who typically rely more heavily on purchased feed, fertilizer and
fuel, continue to struggle with profitability. To top it all off, increased
volatility of output and input prices means that there is more risk and
producers struggle to identify and adopt effective risk management
strategies in this new economic environment.

Along with the basic market factors, a variety of structural and demographic
factors are uniquely important in the current situation. Land use factors
appear to be playing a more important, though regionally varied, role in the
ability of the industry to expand. In more and more areas, direct
competition with other agricultural production is limiting or reducing land
available for pasture and hay production. In other areas, more pasture land
is being diverted to recreational use or for development. Crop and pasture
land values and rental rates are increasing rapidly adding an additional
challenge to expansion, particularly for young producers.

The financial environment has changed for most producers as well. The
capital requirements for production are significantly higher in an
environment of high output and input prices. Old lines of credit are often
insufficient to meet the needs of higher operating and risk management
costs. The equity requirements are increased for financing and many
producers face limited credit availability without significantly changing
their production systems or business plans.

The age of cattle producers is often suggested as a reason for the lack of
herd expansion. Age itself is perhaps less of the reason in many cases than
age combined with the factors listed above. Many older producers are simply
unable or unwilling to make the changes to operate in a new business
environment; to take on the additional risks or debt; or to rewrite business
plans to access needed credit. However, age, as a labor issue, is a direct
consideration as some producers simply are unable to handle the physical
requirements of a expanded cow-calf operation. Many older producers are
content to hold at current herd size while others are switching from
cow-calf to stocker operations to reduce labor requirements.

At the same time, the longstanding challenges for young producers are even
greater in the current environment. Higher investment costs along with
increased capital and equity requirements make it especially difficult for
young producers to build a successful operation. Risky and volatile profit
margins make the financial risk particularly high for highly leveraged
producers. And there are continual challenges in the regulatory and legal
environments that producers must navigate in order to operate their
business.

What does it all mean? Is the industry destined to continue shrinking? I
don't believe so. High cattle prices indicate that there is considerable
opportunity for the industry. Growing global food demand and especially
meat demand provides the backdrop for continued viability of the beef
industry, albeit with considerable need to adjust to changing production and
market conditions. The market is trying to encourage increased production
but so far has been unable to overcome the challenges of input market
shocks; changing land use patterns; more stringent financial requirements
and producer age demographics.

However, markets work and will eventually attract the investment and
producers needed to expand production to meet market needs and
opportunities. Progress is slow in the face of the rigidities outlined
previously but markets are persistent and will eventually prevail. If
current price levels are not sufficient to provoke herd expansion, markets
will increase the incentives to encourage a new generation of producers to
invest in the industry. I believe there is considerable potential in the
cattle industry in new market opportunities. Certainly there are plenty of
challenges as well. The industry is transitioning from what it was to what
it will be and that takes time.but it will happen.

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