Economist: Be the low-cost producer in 2018

Cutting costs and staying attentive to market conditions should be big priorities for cow-calf producers facing challenging market conditions in the past and moving forward.

Cattle prices continue to struggle as herd size continues to increase and a protein glut at the consumer meat case led to price declines in the last four years. Producers saw stronger prices briefly after the nation’s calf crop size bottomed out in 2013. But, in the last four years, calf numbers have continued to move higher, straining profitability as supplies facing consumers at retail continue to increase.

“When feed costs increased sharply about 10 years ago, it led to large losses throughout animal agriculture. Those large losses encouraged producers to reduce the number of animals coming to market leading to a sharp decline in meat supplies. After several years of declining supplies, we finally saw prices recover sharply and profitability soared,” said Purdue University’s Director of the Center for Commercial Agriculture, Jim Mintert. “Now, we’re on the backside of that. The cure for high prices is high prices, and the cure for low prices is low prices. The industry responded to high prices and improved profitability by increasing production and that led to the lower price levels we’re experiencing now.”

This market drawback, which Mintert expects to persist through 2018 and into 2019, is a call for caution among producers with their sights set on growth and a renewed focus on cost containment as a way to stay ahead of potential revenue-eroding cattle market declines.

“Though we’ve slowed down quite a bit, the beef industry is still expanding. As we have pulled down calf prices relative to where they were two years ago, we’ve got a portion of the industry not making any money,” said Mintert, longtime cattle market analyst. “That explains the current slowdown. It all depends on individual situations, but I would be very cautious about expansion right now.”

Supply strains and global issues

Compounding the supply issue is the increased production capacity and industry infrastructure that followed the price rebound a few years ago. That growth has encouraged producers to continue to sustain stronger supplies.

At the same time, forage supplies in much of the nation’s Southern Plains and Southeast that were cut sharply from drought conditions earlier in the decade have rebounded. It’s another contributor to the “pressure to expand” despite continued adverse market conditions, Mintert said. Resisting that impulse will be important moving forward.

“Because we ramped up meat supplies faster than we thought a couple of years ago, profitability evaporated for the cow-calf sector more quickly than we thought was likely. The caution in growth right now comes since we have rebuilt the meat supply so much,” he said. “We had a couple of years when everybody could make money, but now we’re back to the situation where low-cost producers are going to be okay, average-cost producers are going to struggle and high-cost producers are going to take it on the chin.”

“We’re clearly in an environment now where being the low-cost producer is paramount,” he added.

This kind of market tightness is nothing new to cow-calf producers, and there are ways to prioritize efficiency and cost containment moving into a year when prices will likely continue to challenge producers. Ranging from marketing decisions to forage management to feed rations and herd health programs, cow-calf producers have options that can yield lower costs and put them in strong financial positions once market prices do begin to cycle higher.

Manage for tight times

First and foremost, it’s important to examine overall managerial cost structures to find any potential areas for improvement. Many operators are more inclined to make decisions during times of higher prices that can sometimes come back to haunt them when markets are more bearish. But, the good news is it is often easy to make adjustments that can cut costs and make operations more efficient.

“Pay close attention to production costs. If you made any managerial decisions during a time of high prices that led to higher cost structures, look at how you can manage those things differently to reduce costs,” Mintert said. “This includes things like changing calving schedules, re-examining weaning weights and other things on the herd management side. Watch those costs and potential returns closely and look for opportunities to capture value in any adjustments you make.”

Get paid for what you do

Being the low-cost producer and the one who produces the highest-quality cattle aren’t mutually exclusive. But, you may not be getting full value out of the work you’re doing with genetics and herd health, for example. Adding value to those steps in the production process should be adequately rewarded once your cattle are priced.

“There are a lot of opportunities to capture value today if you are producing high-quality cattle. If you’ve got high-quality genetics or are doing things with respect to herd health, are you getting paid for that work?” Mintert said. “It’s all about showing buyers the value differences in your cattle. For example, if you’ve been putting effort and money into genetics so you’re producing an animal with a higher-quality carcass that’s going into a feedlot, are you getting compensated for that? If not, you should explore ways to get that value through the right partnerships.”

Manage your operation only

In times of low market prices, sometimes it’s easy to get drawn into the latest industry analysis or conjecture and make changes based on that information. But, it’s important to always look inward first: What is right for other operations may not work for you, and operational size has a lot to do with that. Larger operators may find it easier to make changes to contain costs that are more difficult for smaller-scale producers.

“It can be more challenging as your production volume drops off. If you’ve got 50 cows versus 500 cows, it might be challenging to establish the relationships you need to capture value,” Mintert said. “But there are opportunities. Things like seeking out a cattle buyer who will reward you for your management, or finding a new feed supplier are ways to do it, but they take effort. If you’re a smaller operator, you have to search harder. If you’re larger and have strong genetics and herd health programs, it can still be difficult, but you’re linking to a commercial feedlot, not a new buyer or feed supplier.”

Market factors that ‘buck the cycle’

Historically, the cattle cycle has been a major bellwether for market price movement, and in years past, it’s been fairly accurate. That’s changed, however, as macro-level market dynamics like feed supplies and global trade grow in their influence over domestic cattle prices. It’s critical to keep a closer eye on factors like these moving through the next few years and, even more importantly, make adjustments when they start to pressure prices.

While the world’s feed supply has become much more stable with growing crop development in South America and elsewhere around the world, it will remain on the cattle market’s radar for the forseeable future. But, the global trade picture is the outside market factor to watch in 2018.

“The odds of production costs skyrocketing and causing a shift in the market cycle are low because we have not only rebuilt our corn feed grain stockpile in the U.S., but we’ve pulled a lot of acres into production around the world. So, the likelihood that we would get into a very tight supply situation – even with a drought in the U.S. or South America – is also low,” Mintert said. “The thing that worries me more is the trade picture. We are very heavily dependent on exports, more so than many people realize. As I look at the trade discussions taking place, I am concerned we could do something to disrupt the global trade flow, and that could be devastating to the meat sector. Growth in demand for animal protein in the decade ahead is expected to come largely from overseas markets so maintaining access to those markets is of paramount importance.”

These specific external market factors are examples of how the traditional cattle cycle has largely been overtaken by specific supply/demand variables that now exert more influence on cattle prices. That puts a premium on both being a low-cost producer and keeping an eye on potential market-movers, like the status of the North American Free Trade Agreement (NAFTA) or any potential animal disease outbreak that could close market channels and send market prices lower.

Most importantly, it will be critical to be nimble enough to make adjustments to your operation to continue to minimize costs and maximize revenue in the current challenging market environment.

“It’s been extremely difficult to use the cattle cycle as a predictor the last few years. We still go through contraction and expansion, but the challenge has been the shock to the beef and cattle markets from outside the system that make the cycle a less accurate prediction tool,” Mintert said. “The market today is more responsive to a multitude of factors that can impact both meat supplies and demand than ever before.”

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