PROTECTING MARGINS -- THE BIG SQUEEZE

The beef industry has never been integrated like much of the pork production or all of the chicken raisers. The various sectors compete horizontally with each other and vertically with other segments of the supply chain. The USDA July inventory was a reminder of the decline in the number of cattle in the country and a preview of the struggles to come.

Industry growth happens for a reason. Profit margins are plentiful and rising prices are signaling the need for more product. The industry responds by producing more product. Nothing is more exciting than the hustle and bustle caused by growth.

The beef industry is in decline. Some feeding operations have closed and some beef plants are dark. Both cattle feeding and beef processing are plagued with over capacity. The nation's cattle herd is shrinking and with it will be tough times for all but the breeders. Oversized facilities will be competing with each other to fill their needs. In the process some more closures may be necessary.

The breeder has not been squeezed by over capacity. Breeders have survived the past few years in good shape and will be benefited by the upcoming shortage of cattle. However, expanding the breeding herd is not as easy as adding a few more pens to a feedyard or killing a few more hours in the beef plant. Urban sprawl and alternative cropping options are taking land away from the breeder and reviving the breeding herd is not an easy task. Expansion requires more subtle changes like fertilizer to increase carrying capacities on grassland.

In the meantime, stocker operators, feeders, and processors will be left to scramble and compete for the dwindling supply of cattle. Competing for a fixed supply that is inadequate forces parties to outbid the other in order to fuel the needs of the physical facilities. The net result is smaller to non existent margins for most.

Begin At The End When Thinking Beef

Ask cattle producers what business they’re in, and often they’ll say the cattle business. “But really it’s a business that begins with the American mom,” says Mary Lou Quinlan, CEO of “Just Ask a Woman,” a strategic marketing consulting firm in New York.

“Start to think not just of the steer, but the steak,” she told a group of cattle feeders recently. “You say you’re in the cattle business. She says you’re in the beef business – you’re in the ‘what’s on my plate’ business.”

To make sure beef stays on the plate, Quinlan challenged cattle feeders to become part of the conversation about the safety and healthfulness of conventionally-produced beef. “Conventional beef isn’t being out-sold by organic, it’s being out-told,” she says. “So before a greater number of shoppers get to the point where they’re making purchases out of fear or frustration, they need support so they can become more confident in the beef they’re buying.”

Quinlan suggests cattle producers first consider how they describe who they are and what they do. If you’re not producing natural or organic beef, you probably think of yourself as a “conventional” beef producer. However, Quinlan suggests that “traditional” may resonate better.

“Traditional means a lot of things. Traditional is the emotional high ground. It recalls those family dinners. And it’s also beef that is raised with traditional care – best practices, things that have been learned and hold true from generation to generation.”

Quinlan says three pillars describe who you are and what you do as a beef producer.

The first is trust. “(American moms) know you must take good care of your cattle because your own families depend on it.”

The second is safety and Quinlan says because of USDA inspection and oversight of the beef business, cattle producers have that in spades.

The third, and perhaps most important, is freedom of choice. “Organic isn’t the enemy. The enemy is anyone who takes away her freedom of choice. Her common sense has been assaulted by propaganda in an effort to convert her and control her options, and make her feel guilty,” Quinlan says. American moms resist and resent that, because they feel their ability to choose what’s best for their families is being challenged.

To help cattle feeders become more involved in telling their own story, Quinlan suggested a phrase to use as part of their elevator speech: “We produce beef you can count on, beef you can depend on, that is going to come through for you and your family. Traditional beef, grown with traditional care, grown by America’s cattle farmer families, perfected from farm to market to table.”

Confined Livestock Are Better For The Planet

Stanford University recently startled the world with its conclusion that conventional high-yield farming is far better for the planet than low-yield farming (see “Beef’s Environmental Sustainability Considerably Improved”). And this includes the First World’s current icon – organic farming.

We know high-yield farms need less land to produce the same amount of food, protecting the huge amounts of soil carbon that would be gassed off if we plowed more land for low-yield crops. However, the Stanford study says high-yield farming may have saved 600 billion tons of CO₂ emissions – equal to one-third of the greenhouses gasses emitted from the whole industrial revolution since 1850!

“Our results dispel the notion that modern intensive agriculture is inherently worse for the environment than a more 'old-fashioned' way of doing things,” said Jennifer Burney, lead author of the Stanford study.

And, that’s not all: Confinement feeding of livestock – that favorite whipping boy for Greens – also helps sharply reduce greenhouse emissions. I recently estimated it would take the land area of New Jersey for chicken “playgrounds” if we put all our birds outdoors. It would take the land area of Pennsylvania to raise our hogs on free ranges. Stanford should now estimate the soil carbon losses if we plowed those millions of additional hectares for animal “playgrounds.”

Indoor animals are also more comfortable, and thus need about 15% less feed per pound of protein produced, saving still more acres of land for Nature and still more carbon left in the soil.

Feedlot cattle, eating grain from high-yield fields, produce less methane in their guts than cattle digesting grass – because grass is harder to digest. Studies on beef cattle show methane emissions reduced by 38-70%.

Jude Capper of Cornell University reported last year (Journal of Animal Science, March 13, 2009) that more milk, from higher-yielding cows that are fed more grain and less grass, have helped reduce the carbon footprint of the U.S. dairy industry by 43% since 1944.

“Interestingly, many of the characteristics of 1940s dairy production – including low milk yields, pasture-based management and no antibiotics, inorganic fertilizers, or chemical pesticides – are similar to those of modern organic dairy systems,” Capper notes.

Capper’s study also found that supplementing dairy rations with genetically modified rBST would use 2.3 million fewer tons of feedstuffs, need 540,000 fewer acres of land for crop production, and require considerably less chemical fertilizer and pesticides

Confinement feeding also protects our streams and rivers. The manure from outdoor animals washes into the nearest creek. The wastes from confinement animals are collected and used as organic fertilizer on crops.

Are confinement animals less happy? Probably not. Cattle, hogs and chickens are all prey animals, and they see safety in numbers. They like being together. Cattle graze and travel in herds. I’ve watched free-range turkeys, which always seemed to be huddled together in a corner of their pasture.

If the environmental movement really believes humans are warming the planet, these studies tell us that Greens must recant on their criticisms of high-yield farming and confinement feeding. They need to stop demonizing the chemical fertilizers, the pesticides, the confinement feedlots and the biotechnology which will be needed to produce twice as much food – from today’s farmed acres – in 2050.

Or is demonizing modern farming too important to fund-raising in the cities?

Resources:
Jennifer Burney, et al, “Greenhouse Gas Mitigation by Agricultural Intensification,” Proceedings of the National Academy of Sciences, pnas.org/cgi/doi/10.1073/pnas.0914216107; 2010.

Jessica Marshall, “Grass-Fed Beef Has Bigger Carbon Footprint, Discovery News, Jan. 27, 2010.

Jude Capper, et al., “The Environmental Impact of Dairy Production: 1944 Compared with 2007,” Journal of Animal Science, March 13, 2009.

-- Dennis Avery, Hudson Institute environmental economist (cgfi@hughes.net)

Government in the Market -- A Recipe for Disaster

Government in the Market -- A Recipe for Disaster
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Producer A markets one pen of cattle a year. The quality is excellent and the marketing weight is 1,300 lbs.. Producer B markets a pen of similar cattle each week year around. Producer B enters into a marketing agreement with a local processor. Producer B earns a $1 cwt. premium to the market under the marketing agreement. Is Producer A entitled to the same price?

The question of equity in markets is as old as the markets themselves. The question is not only should every animal of similar quality be compelled by government to bring the same price, but also the broader question of rights of parties to engage in contracts binding the parties to various and diverse price arrangements.

An attempt by government to mandate price for all cattle of similar quality sold at a similar time is a form of price control. Any cattle feeder with memories of Nixon's price freeze in the 1970s will understand the meaning of government control of pricing. It is a recipe for disaster and will result in the opposite of free markets and open price discovery.

Banning packer feeding, formula contracts, or forward contracting is the first step to eliminating the freedom of choice that guides commerce creating efficiency and lowering food cost for all consumers. There will be no competition for best price if every best price is matched by a government order awarding the same price to all producers. If a producer is able to convince a processor of a benefit from a certain group of cattle, and the packer awards a premium, it doesn't even matter if the benefit is real or perceived.

Flipping the equation over, there is little motivation for processors to pay formula contractors a higher price than cattle might bring in the open marketplace. This logically confirms the fact that any premiums are earned and deliver added value.

Packers and Stockyards have recently issued a new directive intended to deliver more equitable pricing to producers. This is a comment period and it is important for the cattle industry to hold on to the existing price discovery mechanisms. Turning fair pricing over to the government is bad for everyone and has been proven time and time again.

Flawed Science & Manipulated Numbers:

Flawed Science & Manipulated Numbers:

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The ethanol industry was an early and strong supporter of President Obama and he hasn't forgotten it. The much delayed change to the blend level of ethanol in gasoline is sitting on the horizon for determination. The subsidy for ethanol is before Congress as well as the review of the excise tax placed on foreign ethanol shipped to this country. Never has an energy policy moved so logically awry and never has the government run so afoul of economic fundamentals in pursuit of a political objective. The corn based ethanol program will be a case study for government incompetence for years to come. Government officials are not unaware of the flawed science they are using to support policy. Study after study have confirmed the failure of ethanol to save energy and the impact ethanol has had on raising food cost for all consumers. This has not been a trade off, but has squarely caused a net harm judged purely on the economics. Government officials have reacted by cooking the books and revising downward the energy requirements for corn use in ethanol plants and raising the benefits of ethanol in gasoline. No one wants to admit support for a program that doesn't prove up so the easiest solution is to change the values used in the inputs and outputs until the program proves a benefit. The problem is there is no support among independent researchers. Congress has recognized the inability of the ethanol industry to move away from corn and develop cellulosic sources for feedstocks so they have reduced the percentage of cellulosic inputs required for the coming years. Alternative energy sources are needed and the list of possibilities is a long one but somewhere along the way there is a need for economic justification of the cost and benefits. Any industry must have sound fundamentals. The nation's ethanol plants have already gone through one reorganization. It time to stop and get it right before moving forward.