Jolley: Five Minutes With Professor Ted Schroeder, Kansas State University & The Future Of The Cattle Business

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Buried under unending reports of the crashing economy, accidently bubbling crude, wars on multiple fronts, worldwide political uncertainty and a security problem on our Southern border is a lot of news about the cattle business. The general press is so concerned with the sensationalism of animal abuse cases and hot button stories about factory farms that they’ve failed to follow a much bigger story.

What’s happening to the cattle business? Will it still be a major factor in North American agriculture in 50 years? Or will changing weather patterns, the forces generated by emerging international trade issues, and the rapidly rising costs of doing business conspire to make working cattle ranches a nostalgic thing of the past by the mid 21st century?

Dr. Ted Schroeder does research on livestock marketing and price analysis at Kansas State University, giving him a chance to watch many of the factors that alter the course of the cattle industry. His research focuses on improving commodity market efficiency by investigating price discovery methods, market information, improving market coordinating mechanisms, and forecasting. Ted also teaches agricultural marketing. That’s what it says on the KSU web site.

I was interested in talking with him about the long term effects of a decreasing herd, the new NAIS, how to feed an extra two billion mouths and a few other social issues that have a way of knocking a nice orderly marketplace into a helter-skelter mess from time-to-time. If you’ve been paying attention to Ag news and you’re a little apprehensive, read on. You might not feel any better but you might learn something.

Q. Dr. Schroeder, from all that I’ve read and all the conversations I’ve participated in, it strikes me that the cattle industry is coming to a lot of cross roads all at once. There are definitely a lot of issues coming to a head right now. Let’s look at a few of them. Herd size is projected at a 50 year low. What are the factors that have driven it so far down and what will the impact be on prices?

A.
As of January 2010, the U.S. beef cow herd was 31.4 million head, the smallest it has been since the early 1960s and 6.5% smaller than it was in 2000. The beef cow herd peaked at 45.7 million head in 1975. A large number of drivers have contributed to the long-run decline in cow herd size. Foremost, the long-term increase in carcass weights rapidly increased beef production making it so much more beef per cow was available to the market. Even with more than a 30% reduction in cow herd size, total beef production was roughly the same in 2009 as it was in 1976 (one year after the peak in herd size).

In contrast, in 1976 steer carcasses weighed an average of 695 lbs compared to 847 lbs in 2009, more than a 20% increase. Since the late 1970’s, domestic beef demand has declined precipitously and, as a result, consumers were not willing to pay as much for, or consume as much beef, as they did previously.

From 1980 to 2009, inflation-adjusted retail beef price declined 30% and per capita consumption declined nearly 20%, a very dismal beef demand story. Though beef demand strengthened modestly during the early 2000s, it has weakened again since then. The export market, though extremely important, has not expanded rapidly enough since the 2003 BSE event to offset declining domestic demand.

These trends led to lower calf prices encouraging further cow herd liquidation. Couple these trends with increased costs of beef cow production in recent years, especially land costs, reduced calf prices because of high and volatile feed grain prices, and high energy costs, and cow-calf production has not been a very lucrative business.

At some point, if beef demand stabilizes, export markets expand, the cow herd decline results in further reductions in beef production, and carcass weights do not increase substantially, beef prices will strengthen. The result will be higher fed cattle prices, and depending upon what happens to feed grain prices, stronger feeder and calf prices. However, all the stars need to align for these optimistic forecasts to become reality.

Q. NAIS was born over 5 years ago and died an agonizing death. Now we’re looking at a new animal identification program that APHIS has recently been taking to stakeholders. Talk about cost/benefit ratios for two different stakeholders – the large rancher with a herd of a hundred or more and the small rancher with a herd somewhere around the national average.

A.
The simple answer is, I don’t know. As I understand the new federal animal identification requirements, they will only apply to animals that move across state lines and states are still designing the methods and forms of animal identification that individual producers who wish to move animals across state lines will need to comply with. Since I don’t know what individual state guidelines are going to be, I do not know how to estimate costs of compliance for producers who wish to move cattle across state lines.

It is possible that a producer, regardless of size, would incur no additional cost and realize no added direct benefit from the new system if the producer is already identifying his animals in ways that comply with the particular state of destination. If the new system helps to manage animal health better than the current systems states utilize with official health certificates and associated individual animal identification requirements to cross state lines, then an indirect benefit to producers of all sizes would be reduced animal health risks.

How much the new animal health management system may differ from current standards for intestate movement of animals is unclear to me at this stage, but it does not appear to be substantial change from status quo. As such, I have not identified substantial costs or benefits of the new system relative to what we do now. Of course, if different states adopt different protocols or requirements, then I would envision added costs for producers trying to comply with a myriad of different regulations.

Q. A few months ago, you gave a speech at KSU’s Cattlemen’s Day on feeding the world. It seems to me that many of the trends of the day fly in the face of the need to feed billions more by the year 2050. How are we going to do it? More importantly, can it be done?

A.
Yes we can feed more than 9 billion people by 2050. Moreover we can feed them better than we feed less than 7 billion today. In 2050 the population will have more nutritious, safer, higher quality, a broader variety of, and more affordable food than today. To accomplish this requires intensive investment in 1) education, 2) research, 3) technology development and adoption, and 4) more trade of goods, services, and knowledge among countries and people.

Advancement of these activities will result in higher incomes of people in both developed and in poor countries. Curtailment, restrictions, barriers, or impairment to any of these important investments will result in compromising the magnitude by which we can improve the quantity, quality, safety, and affordability of food. Well-designed domestic and global policies can substantially enhance these events and poorly designed policies will undoubtedly slow these developments.

I have often used an illustrative example of corn yields in Iowa where adoption of genetic engineered seed varieties has resulted in yields increasing at an annual rate of 3 bushels per acre per from 1994 to 2009, from about 130 to 180 bushels. In contrast, in Italy where genetic engineered corn varieties have not been adopted, yields have remained flat at best, or even decreased, over the last 15 years. Unjustified derailment of trade in goods, services, and knowledge or in food production and processing technology development and adoption will result in higher global food prices, less food availability, and food riots.

Q. There is also a bit of debate over cap-and-trade and its effect on the cattle business. Can you shed some light on it?

A.
I have some strong opinions on this topic, but this specific area is beyond my expertise comfort zone, so I have to pass on answering this question at this time.

Q. "It's the economy, stupid" was a phrase in American politics widely used during Bill Clinton's successful 1992 presidential campaign. What has the economy done to beef demand and are we looking at a permanent change?

A.
Beef demand is heavily dependent on the strength of the economy. Because some beef products are relatively high priced and considered luxury goods (e.g., steaks) compared with competing meats, beef is hurt more by an economic downturn and benefits more from an economic upswing than pork or poultry. When consumers reduce spending because of reduced income or increased savings, they cut back spending on more expensive food items first and ratchet down to lower priced proteins.

As such, the recent recession did benefit ground beef and cull cow prices but at the expense of steaks and middle meats. The economy will see prosperity again and, as such, beef demand growth again because the product is still highly desired by consumers. So, once incomes begin to grow and consumers are willing to spend more, they will spend increasing amounts on beef products. So, the downturn stagnation in beef demand is not a permanent change. However, when recovery occurs, the industry needs to be well prepared with product offering that meets what modern consumers want.

Q. Climate change as a permanent thing may or may not be real. In the past few years, though, we have gone through some of the toughest winters in memory. Let’s assume a long term change with greater extremes. What will be the impact on the North American cattle herd?

A.
Weather extremes adversely impact beef production in many ways including fertility, growth rates, efficiency of gain, and many others our production scientist friends can explain much better than I can. If weather extremes are a permanently more common occurrence, something that I am neither claiming to be true or false and certainly am not qualified to assess the veracity of, the beef industry would realize greater production risk and increased costs.

Furthermore, cattle producers will be more adversely impacted relative to producers of animals raised in confinement and protected from weather extremes. Permanent weather pattern changes can in the long run encourage investment in more facilities to reduce weather impacts and can eventually result in migration of where animals are raised or finished. Such changes are typically slow to occur but economics will ultimately determine who produces cattle and where based upon geographic comparative advantage both domestically and around the world.

Q. Thousands of people read Cattlenetwork. What would you like to say to them?

A.
Global demand for beef is increasing and will continue to do so as consumer incomes around the world expand. However, the world’s beef industry is very competitive and our competitors are formidable. We have to become smarter, more able to collect and analyze exponentially growing information, more responsive, more creative, and better prepared to compete. The good news is our next generation of young talent is ready and eager to help us compete. Hand them the reigns and support them.

Chuck Jolley is a free lance writer, based in Kansas City, who covers a wide range of ag industry topics for Cattlenetwork.com and Agnetwork.com.



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