April 26, 2019
The feedback loop between feed prices and meat production runs fulltime and unimpeded. Livestock producers can’t afford to feed animals if they don’t get paid enough to recoup that cost plus all other costs.
The following graph shows the last 20 years of feed costs relative to U.S. meat production. In order to show feed cost with one price, I applied the feed ratio of 2.6 bushels of corn per bushel of soybeans. Of course, each livestock sector has its own feed ratio of corn to soybean meal, but over the last two decades this is the ratio that the entire U.S. livestock industry has used. This weighting was applied to the average annual cost of corn and soybeans.
The cost of feed spiked from $3.19 a bushel in 2006 to $6.54 per bushel in 2008 before hitting its peak at $8.64 per bushel in 2012. This feed cost shock led to an unprecedented slowdown in U.S. meat production which declined, and then stagnated for seven years; U.S. domestic meat consumption declined and languished for eight years. U.S. meat production and domestic consumption didn’t return to a growth mode until 2015 when feed costs had fallen 40% from their drought induced peak.
Since 2015, the softening corn and soybean prices have been the bane of corn and soybean growers, but the lower prices have powered a rapid expansion of the U.S. meat industry. However, that strong growth has not been shared equally by the different types of protein. This unequal growth points to some important considerations both for the protein sectors and different regions of the U.S.
Since 2000, chicken has had a 1.7% compounded annual growth rate (CAGR). Pork has seen a 1.85% CAGR over the same period, and lastly, beef only managed to grow at a 0.06% CAGR during this period. So, why have chicken and pork outgrown beef by an order of magnitude? Technology has allowed U.S. poultry and hog producers to turn the chicken flocks and swine herds faster and more efficiently than ever. In 2000, U.S. hog operators produced 102.4 million hogs with 6.7 million sows. In 2019, they will produce 135.7 million hogs with only 6.3 million sows. So, producers have achieved 41% improvement in breeding efficiency. In contrast, the cattle and milk industry produced 38.8 million calves with 42.9 million cows in 2000. In 2019, they will produce only 36.5 million calves with 41.2 million cows. This represents a 2% decline in herd efficiency. The cattle and dairy industries are starting at a major cost disadvantage due to a lack of technological improvement.
One of my major premises involves the future disruption of ethanol demand as battery powered vehicles take market share from internal combustion vehicles. This technological showdown involves trillions of dollars (yes, with a “T”) of spending over the coming decades, and the ethanol demand will go along for the ride. In 2018, 5.05 billion bushels of corn flowed into the stills of the ethanol producers representing 40% of U.S. production. But, if the market doesn’t want the ethanol because it doesn’t want the gasoline, what does it do with the corn, and at what price?
The next best use historically and economically comes from livestock. Global demand for meat continues to grow robustly with 1.1% population growth and rising global GDP in lower income countries. So, U.S. agriculture will take advantage of the supply of relatively cheap corn and soybeans to produce more protein. But, what type of protein? Unless the cattle industry finds something amazing in terms of productivity, the growth will continue to be chicken and hogs. And, this presents a problem for some key agricultural states that simply don’t produce chickens and hogs.
One of my mantras is that “life is a team sport”. Livestock production requires a teamwork attitude, and the producers require a vast network of technological suppliers of financing, genetics, feed, feed supplements, robotics, and software. They also need someone to take the animals for processing. A new state-of-the-art processing facility can easily cost more than $250 million dollars, just for the physical facility. It also requires a team of specialists to manage the Food Safety Modernization Act (FSMA) complexities and the environmental challenges. Lastly, it requires a workforce that will work with the slaughter process, which is tough to find today.
In some of the western cattle and dairy states, they don’t have these established networks of pork and poultry producers and processors, and these networks don’t spring up spontaneously. They require someone with the expertise and capital who is willing to take on the risk to make it happen. Why would the existing network of pork and poultry producers move into these western states? If they are constrained by growth opportunities in their traditional production regions, they might make the geographical jump. However, most of the recent announcements of new and expanded pork and poultry facilities have been in existing regions. It appears that producers prefer to deal with the issues of the existing footprint rather than the challenge of establishing entirely new systems.
So, what if these western states stick with their cattle and dairy intensive focus? Producers can still make good economic returns through innovation and long-term growth in beef and dairy demand, but they will lag behind in overall agricultural growth. If they don’t use the corn and soybeans locally for livestock, they will have to discount them through a lower cash basis to move them to where they are needed. Lower cash basis means lower farm incomes and lower land values. Why should they leave this money on the table?