Technically Speaking

"Death" is obviously an exaggeration for dramatic effect. One should never underestimate the resiliency of the cattle industry. But the principle is none-the-less concerning.

We have been trained to always fear the next shoe dropping, initiating the next price collapse that we have been trying to prepare for, as DTN Senior Livestock Editor Jennifer Carrico so well pointed out here: https://www.dtnpf.com/…. But now, many may be starting to worry about when a lower price may be seen, which would allow herd expansion to begin.

As it stands, there is currently a negative feedback loop of slaughter prices being so high they are stressing the limits of the affordability of breeding stock to the point of interfering with herd expansion; then the smaller calf crop tightens the supply of slaughter animals, driving prices higher, and so on.

One of the greatest obstacles to breaking the cycle by expanding is the knowledge that it takes years to pay for breeding stock but months for prices to collapse. Who can forget 2014-15, or BSE in Canada that decimated years' worth of value creation?

Add the difficult economics of expansion due to high breeding stock prices, the soaring costs of land, equipment, repairs and now increasing interest rates and even maintaining a continent-wide herd becomes a challenge let alone expanding it.

Not helping is a common risk management practice of reducing position size as risks and profits increase. In effect, allowing the herd to shrink while maintaining the same level of financial risk and profit goals. The problem with that on an industry scale is it contributes to the situation that inspired this post.

Then there are the politics of the environmental advantages of the industry contracting thanks to its own prosperity. Imagine the reaction if world leaders decided for the good of the planet, the cattle herd would have to be significantly reduced. The reaction would be immediate and aggressive in defiance.

Now consider a situation where beef gets very expensive, older generations use it as their severance (retirement) package and the next generation is reluctant to buy in or grow -- at anywhere near the same scale, anyway. The changing demographics come into play as the next generation is often unwilling to make personal sacrifices the way the previous one had to; they have far more lucrative salaries available to them than in the past amid the shortage of skilled and ambitious workers and they have a desire for a better work/life balance. And you end up with (almost) everyone happy allowing the herd to be reduced on its own.

Not that any government has the final say but there certainly haven't been the same efforts put into lowering prices of beef compared to that for lowering the price of grains, oilseeds and energies for inflation fighting purposes.

Like the Biden administration doing whatever they could to help Ukraine fight Russia in the early days of the war, then simultaneously pledging to do whatever was necessary to get Russian grain out to the hungry world, driving prices down in the meantime.

Or the Trump administration calling on Saudi Arabia to get the price of crude oil down, regardless of how bad it hurt American oil producers. Or targeting the best U.S. grain and oilseed customers with tariffs.

Yet the only price-impacting government policies when it comes to beef are supportive in the form of border restrictions due to New World screwworm risks. That's fantastic for the industry for the short-term but does nothing to help with herd expansion issue, inadvertently playing into the environmentalist's hopes for reduced cattle totals.

So, if the future is beef being a luxury item due to a small herd with tight supplies and high prices the result, how does the industry proceed?

Expansion is still possible on an individual level. It might take nerves of steel, some inherited assets (or supportive transitional partners), a willingness to have a challenging work/life balance and a strategy to manage that social aspect for the benefit of all those involved, and some good luck when it comes to help from Mother Nature.

Besides that, risk management may be the most valuable time spent given the likely volatility that lies ahead.

And to be clear -- this is not intended to be an infomercial for DTN -- although it could be given the importance. Simply food for thought.

For more information on the current price rally and related targets, see my previous blog at: https://www.dtnpf.com/….

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I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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