The beef industry is like a middle aged man who smokes, drinks, doesn´t exercise and thinks he´ll be okay as long as he eats three bran muffins every morning and stays away from doctors. Like that candidate for bypass surgery, we too are living in denial about the deteriorating health of the American beef industry. If a human was in as bad a shape as the cow/calf and cattle feeding business they´d be put on life support.
Finally, someone has put the beef industry through a thorough exam and the results of all the tests are back. There´s no easy way to break the news . . . the prognosis is not good. R-CALF USA (United Stockgrowers of America) prepared a document called "The Current State of the U.S. Cattle Industry" that was presented to delegates attending the 2002 Business Forum of the Free Trade Area of the Americas that took place October 29-31 in Quito, Ecuador. R-CALF sent the report, along with two representatives, to Quito to make sure U.S. and South American negotiators had all the facts before they negotiated away your future. The bureaucrats are not the only ones who should read the report.
R-CALF´s detractors may scoff and say the numbers are skewed but the document is painstakingly documented. (We left out the footnotes.) Besides, if you are a cattleman suffering from lower prices you´ll know the diagnosis fits your symptoms.
Early Warning Signs
R-CALF came to the conclusion that the live cattle industry has been in a state of substantial economic crises over the past decade, and remains so today. Here´s a look at the chart hanging at the end of your bed in intensive care.
- "According to USDA data regarding U.S. cow/calf production cash costs and returns, the average gross value of production less cash expenses during the 10-year period of 1982-1991 was $25.51 per bred cow." In other words, from 1981 to 1991 we made a little money -- not much but a little.
"During the following 10-year period, 1992-2001 the average return to U.S. cow/calf producers fell to -$30.40 per bred cow. (Please note the negative sign!)
"During the period of 1992-2001, the average number of beef cows in the U.S. was approximately 34 million head. Applying the average loss per head to the average number of beef cows generates an industry-wide average cash operating loss of over $1 billion over the past 10 years for U.S. cow/calf producers. Actual losses to cow/calf producers were far greater when total production costs were factored, with significantly greater losses occurring during the period from 1996-2001. Based on USDA´s total per head loss for 2001, and again using the 34 million head beef cattle herd size, losses for 2001 alone are estimated at over $15 billion dollars."
- More bad news. The USDA says our financial health is going to get worse. "The USDA expects livestock and livestock product values to fall $9.6 billion in 2002. USDA projects cash receipts for cattle and calves to decline by $200 million in 2002, and is predicting a 23 percent decrease in average net cash income for producers of beef cattle below the average net cash income received during the period of 1997 through 2000. It also predicts that approximately 17 percent of U.S. cattle producers will experience debt repayment problems, representing an increase over 2001."
- "The U.S. cattle feeding sector is also suffering from a persistent economic cost-price squeeze. Using Kansas State data, Auburn University professor Robert Taylor determined that the average return for U.S. cattle feeders during the period 1980-1990 was $41.40 per head. The average returns during the following period, 1991-2001, fell to -$14.60 per head." (Again, note the negative sign.) "Based on the USDA data, United States cattle feeders have lost approximately $3 billion dollars just since March of 2001."
- "United States cattle inventories have been in a state of decline since 1996, with all cattle and calf inventories falling from 103.5 million head in 1996 to 97.3 million head in 2001. Beef cow inventories alone fell 1.9 million head during this period. By January 1, 2003, the USDA expects the U.S. cattle herd to fall to 95.6 million head, its lowest level since 1959. The calf crop in 2001 was likely the smallest since the 1950s and the USDA predicts the calf crop for 2002 will likely be even smaller."
- "From 1999 to 2000, USDA data shows that 13,290 U.S. cattle operations exited the industry. The USDA National Agriculture Statistics Service (NASS) reports that U.S. beef cow operations have declined by approximately 200,000 operations since 1987, with the steepest decline occurring from 1996 through 2001. The total number of U.S. beef cow operations in 2001 was 814,400. Approximately 27,000 additional U.S. cattle operations have exited the industry thus far in 2002, resulting in a further decrease of operations."
How are you feeling so far? A little faint? Wait, there´s more bad news.
The Cure Will Kill Us
We´ve always been told that the cure to hard times is more hard times. In other words, enough of our neighbors will leave the industry so that it will eventually become profitable again. Yeah, right. And chicken soup can cure cancer.
According to R-CALF, "the ongoing crisis in the U.S. live cattle industry cannot be explained by the historical cattle cycle."
"The U.S. live cattle industry has been historically characterized as a cyclical industry," says R-CALF. "The cattle cycle refers to the rising and falling of cattle inventories that result from changes in live cattle prices. It was the equivalent of an industry-wide self-management program, but the competitive market drove it, not an industry or government directive."
"The cattle cycle historically occurred every 10-12 years, a function of the long biological cycle for cattle. USDA reports it consists of about 6 to 7 years of expanding cattle numbers, followed by 1 to 2 years in which cattle numbers are consolidated, then 3 to 4 years of declining numbers before the next expansion begins again. USDA reported in 2001 that the cycle has been shortened over time. Many in the industry believe the historical cycle may have ended."
"USDA recently acknowledged the last cycle was nine years in duration; the present cycle is in its thirteenth year, with two more liquidations likely. This certainly does not reflect a shortened cattle cycle, and even granting USDA its prediction of two more years before the US cattle industry begins rebuilding its production capacity, a 15-year cycle with 6-8 years of liquidation is well beyond the historical perimeters of a functioning cattle cycle."
The Patient Really Is Sick
We are not hypochondriacs. There is a real disease causing our current discomfort. According to R-CALF it is simply this: "Total cattle and beef imports are outpacing the decline of the U.S. cattle herd."
"Under present trade policies and practices, the U.S. is supplanting domestic production with imported beef and live cattle at an alarming pace. Imports of beef and live cattle have steadily outpaced the decline of our cattle herd since 1996. The U.S. trade deficit in cattle and beef is likewise outpacing the decline of our cattle herd."
"The adverse effects of this continuously growing volume-based trade deficit can no longer be masked by emphasizing trade values over trade volumes as the U.S. cattle industry now finds itself in an unfavorable value-based trade deficit as well."
"The U.S. live cattle industry is highly sensitive to changes in beef volumes. Cattle industry analysts have historically emphasized the value relationship of U.S. imports and exports, arguing that we have a trade surplus in beef when measured on a value basis. As a result of this emphasis, little attention was paid to the impacts of trade volumes on the U.S. cattle industry. However, the year 2000 marked the last year we had a trade surplus in beef when measured on a value basis, with the United States experiencing an $82 million dollar beef trade deficit in 2001. This value-measured deficit appears to be growing rapidly in 2002, with the United States experiencing a $252 million beef trade deficit at the end of August 2002." According to R-CALF, "The U.S. is now a net importer of cattle and beef regardless of whether trade flows are measured on a value or volume basis."
"Evaluating the cattle/beef trade in terms of value, however, ignores the impact that imported cattle and beef volumes have on the U.S. live cattle industry. Particularly their impact on domestic cattle prices when the domestic market is saturated, e.g., when the U.S. cattle industry is in a liquidation phase, or when importers strategically time import arrivals to leverage down domestic cattle prices or to prevent price increases."
According to R-CALF, "while U.S. cattle producers continue liquidating to achieve a more favorable supply-demand relationship that will support higher domestic live cattle prices, record imports are far outpacing their domestic supply reductions, effectively nullifying their efforts."
Taking Their Own Medicine
While the NCBA is pushing for more trade agreements, R-CALF used NCBA numbers to show such agreements can have a devastating impact on our prices.
"According to Chuck Lambert, Chief Economist at the National Cattlemen´s Beef Association, "The rule of thumb is that a 10 percent increase in beef supply results in a 15 percent to 20 percent decrease in price." Even small increases in supply - as little as 2 to 3 percent - can have significant downward effects on price. "Thus, increased beef imports can significantly affect the price received by U.S. cattle producers," says R-CALF.
"Beef and live cattle imports have increased significantly in recent years, with beef imports increasing from 2.1 billion pounds in 1996 to 3.2 billion pounds in 2001. Live cattle imports increased from 2 million head to 2.4 million head during the same period. Combined, these imports caused the U.S. trade deficit (total imports minus exports) for cattle and beef to grow from 1.5 billion pounds in 1996 to 2.4 billion pounds in 2001."
"The 2001 trade deficit for cattle and beef of 2.4 billion pounds represents an approximate 10 percent increase in supply over the United State´s 24 billion pounds of domestic production. Applying the aforementioned "rule of thumb" to the 2001 production year, prices received by U.S. cattle producers were negatively impacted between 15 to 20 percent. This means fed cattle prices in 2001 would have likely been between $83.03 to $86.64 per cwt., rather than the $72.20 per cwt. actually received, if not for the increased import supplies. If this rule of thumb is accurate, U.S. producers lost between $130 to $173 per head on their 2001 production due to the ongoing United States trade deficit in cattle and beef."
R-CALF contends that the reason we get conflicting reports on our condition is that "the USDA and the International Trade Commission are using faulty economic models to evaluate the current state of the live cattle industry. The General Accounting Office (GAO) released a report in March 2002 titled Economic Models of Cattle Prices: How USDA Can Act to Improve Models to Explain Cattle Prices. The GAO´s report criticized both USDA´s and the International Trade Commission´s (ITC´s) economic models, models commonly used by these agencies to evaluate the United States´ cattle and beef sector, and suggested revisions to them. As a result of these faulty models, reports issued by both USDA and ITC likely understate the current economic difficulties being faced by U.S. cattle producers."
"Evidence that historical indicators can no longer explain or predict what is happening within the U.S. cattle industry abounds. As recently as October 1999, the USDA grossly miscalculated the cattle industry´s production trend by predicting that U.S. beef production would decline in 2000 by 4-7 percent below 1999 levels. U.S. production in 1999 was 26.4 billion. Thus, the USDA predicted 2000 production would fall by as much as 1.8 billion pounds. However, production in 2000 reached an all time record high of 26.8 billion pounds. The USDA under-forecasted this short-term prediction (less than 14 months) by 2.2 billion pounds, the carcass weight equivalent of nearly 3 million head of live cattle."
"The USDA is predicting even further industry losses, without factoring in the prospects of additional imports of beef and live cattle resulting from any new Free Trade Agreement."
In other words, we are much sicker than our quack USDA doctors are telling us. Using painstaking research R-CALF came to the conclusion that "any trade agreements that do not address all market distortions, and that do not provide minimal protections for producers of live cattle are a clear threat to the future profitability of independent cattle producers in the U.S. and to the future sustainability of the rural communities they support."
The only question remaining is will the patient heed the early warning signs before we are thrown on the bone pile with the other carcasses of previously destroyed American industries?