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Animal Science: Today and Tomorrow

November 27, 2013

Dr. Tom Troxel                                                                                 Dr. Michael L. Looper

Land Values Higher

According to a recent report from USDA, January 1, 2013 AG land values surged higher on record corn prices. Average cropland values topped $4,000/acre, up 13% over the prior year.  Pasture values also increased, up to $1,200/acre, a 4.3% annual increase. Average farm real estate values reached $2,900/acres, up 9.4%. The largest land price hikes occurred in the oil/gas regions of the Northern Plains and Southern Plains, as well as the Corn Belt.

Managing an operation from a business perspective requires consideration of land value appreciation in addition to operating returns. While land appreciation is not cash in hand, it builds wealth and expands bank borrowing capacity. However, “past performance is not indicative of future behavior”. With deferred corn contracts now below $4.70/bushel, we will likely see cropland values lose some of their steam (Source: CattleFax).

Show me the money!

USDA’s Economic Research Service reported the breakdown of the 2011 U.S. food dollar and where it goes. The largest share of the dollar (32.2 cents) went for the services provided by foodservice operators. The word “services” does not include the food itself, just the services provided with that food. It is pretty remarkable that Americans can spend nearly one-third of their food dollars just for other people to prepare and deliver meals and then clean up afterward!

The next largest share is for processing at 22 cents. This one isn’t a surprise as much since very little of what we buy looks much like the product that leaves a farm. Virtually everything other than fresh fruits and vegetables must be processed in some way to make it more usable or preserve it long enough to reach a consumer in usable condition.

Food retailers got 12.2 cents of every food dollar, only 40% as much as was taken by foodservice establishments. That strikes as surprisingly small number given the level of investment and service provided by today’s food retailers. Walk into a modern grocery store (which is MUCH, MUCH MORE than a grocery store) and look at the breadth of the product offering. It is pretty astounding that we have all of those products available to us.

Finally, the farm and agri-business share of the dollar is just 10.3 cents. That seems a pretty small amount and some would say that its size shows the inefficiency of our food market system. One must realize that all of those other services are necessary to deliver the products that consumers want. If consumers did not want them, then the services would not be performed. That doesn’t mean that everything that is done is correct in the long run. There are a lot of failed ideas and efforts whose costs must be paid. But for every one of those there is a success that brings value to consumers.

In the long run, the U.S. agricultural and food system has performed remarkably well and we need to be careful about forcing it in culturally and politically popular directions. At the same time, we should not hesitate to offer consumers what they want. Organic? Raised locally? From “happy” animals? No problem as long as you are willing to pay the full cost of such characteristics which other consumers may not value. Our food system isn’t perfect but shows us another that is better (Source: CME Group).

Profit potential for the next two years

The combination of sharply lower corn prices (down 45% from a year ago) and livestock prices that remain near all time record highs has dramatically changed the profit outlook for producers going forward. Predictably, the response has been to reduce the number of beef cows that are sent to market each week.

Normally beef cow slaughter increases into November as more cull cows become available ahead of the winter. This year, however, cull cow availability is particularly tight. Several years of liquidation in the beef cow herd have caused producers to cull many unproductive cows from their herds. According to calculations from the Livestock Market Information Center, cow-calf producers are on track to have the best margins on record next year and producers will try their best to carry as many cows over the winter as they possibly can. Some parts of the country that were hit particularly hard by droughts in recent years have seen a dramatic reduction in their beef cow inventory.

The expectation is for beef cow numbers to remain very tight through the end of the year and into next spring. It is important to note that weather will remain a key driver for the market in 2014. While the motivation to expand is strong and calf prices are promising record returns, it will all mean little if we have another drought next year. After all, the profit potential has been quite strong in the last two years as well and producers have been retaining heifers.

The problem is that with drought ravaged pastures, it is impossible to expand the herd. For now, producers appear to be once again retaining heifers, which could limit the supply of beef next year (fewer livestock going into feedlots). The decline in cull cow slaughter also will limit the supply of lean beef available in the market. With fat trim prices about 70% higher than a year ago and lean beef prices that could once again test record highs, ground beef could be at a significant disadvantage in the meat case. One need only look at the ratio of ground beef prices to chicken breast recently to understand what will be the favored protein in the meat case next year (chicken; Source: CME Group).

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