Many Januarys ago, while I was still struggling with the illusion that a rising tide would lift all cattle boats, an old-timer tried to set me straight about the chronically uneven distribution of revenue within the beef industry.
"Son," he painfully wheezed through multiple layers of market scar tissue, "don't hold your breath waiting for equal pieces of pie in this biz. Regardless how big the pastry rolls out of the oven, we always run out of dessert way before we run out of waving forks. The only way the family holds together from cycle to cycle is taking turns picking each other's pockets."
Always the slow learner, I initially dismissed the old grump as a vestige of the extremely non-inflationary cattle past. For example, from 1920 to 1946, Omaha fed steers essentially held in a price range no wider than $10 (i.e., $10-$20 per cwt). Market prices "jumped" to a new level after the war, but long-term volatility remained unshaken. From 1950 to 1970, Omaha consistently marked ready steers and heifers from $20-$30 per cwt.
As unimaginable as it seems against today's market backdrop of extreme price change, the assessment of cattle value once ranked right up there with granite formation and the maturation of elephants.
Though understandably rooted in the sluggish past, I thought his sad conclusion that ranchers, feedlot managers and packers were hopelessly stuck in a revolving door of revenue sharing was far too pessimistic.
He almost made it sound like the last of the Donner Party each taking a number to donate toes and fingers for the supper pot.
Surely, I reasoned, once total revenue assumes a more rapid pace of growth (e.g., 1970-1990 and 2010-2015 saw general price ranges of $40 and $65, respectively), one sector's equity position will be largely independent from another's. Yet as 2017 begins, I'm still waiting for my old, long-departed mentor to be disproven.
In more colorful language, his description of ever-shifting fortunes within the beef industry was nothing less than margin analysis. The long production road from pasture to plate is covered by an extended train of business models. Only one unit of the beef express produces a raw commodity (i.e., the ranch factory), while all the other cars limit their focus to limited layers of added value (e.g., 400-500 pounds of corn-fed gain for feedlots).
The profitability of each of these middle players is determined by the fluid state of margins (i.e., the spread between cost of the added value and the revenue generated by the added value). While it's theoretically possible for end-users (i.e., spendthrift lovers of hamburgers and steak) to fund enough overall revenue to ensure decent profits along the entire production and processing chain (2014 was such an extraordinary time), most of the time individual links find themselves "picking the pocket" of other links in order to secure the best possible bottom.
Needless to say, the market's specific mix of supply and demand greatly affects this game of musical chairs. For purposes of discussion, let's assume a steady level of beef demand (isn't demand always the wildcard?). During periods of early herd expansion when ranch leverage is typically at its strongest, the middle margins of feedlots and packers are typically stressed as the revenue attached to added units of value struggles to offset the elevated cost of the same value added.
On the other hand, when herd expansion shifts into high gear and raw commodity leverage softens, middle players are in much better position to be the pickpocket themselves.
The good news for cattle feeders in 2017 is that, after nearly two years of devastating losses, supply (and demand) realities have finally turned in their favor. The happy combination of expanding feeder cattle supplies, cheap feed and forecasts for decent domestic and foreign beef promises to go far in rebuilding the monumental equity loss of the last 18 months.
No, it will be a far cry from the profit orgy of 2014. Yet barring a major disruption in foreign trade and/or a feed-crop-killing drought next summer, I think feeding profits of $50-$100 per head through the entire year are quite likely.
Of course, that means your farm and ranch friends will spend much of the time searching for their wallets.
John Harrington can be reached at email@example.com
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