When will the cows come home? Part III

Previous articles (Parts 1 and 2) have discussed several challenges and opportunities related to the how and where of rebuilding the U.S. cattle herd.

This article discusses the most important asset of the U.S. beef cattle industry…the “who” of herd rebuilding.  It is people – the cattle producers – who make it happen and are the key to rebuilding the beef cow herd and expanding cattle inventories. As with the land use and regional components, there are both challenges and opportunities with regards to the producer issues in the beef industry.

Like farmers of all types, cattle producers have been aging as a group for many years.  USDA data from 2011 indicates that among the 654,000 cattle farms in the country, 37% are operated by producers 65 years of age or older and another 29% are operated by producers aged 55-64. Together these two age groups operate 64% of land used for cattle production. This includes 118.4 million acres by the 65+ producers, 66% of which are the full owners of their farms. In many cases there are no family heirs interested or able to take over the operation.

These demographics suggest that a significant amount of asset turnover is inevitable in the next decade. In the meantime, older cattle producers, like many farmers, often don’t really retire and exit the industry but rather tend to “retire in place” by remaining on the farm and gradually scaling back their operations.

Older producers, on average more financially secure, can afford to cut back by reducing cattle numbers or switching to less labor intensive enterprises according to their health situation and labor ability. The latest USDA data confirms that cattle producers over 65 years of age have a per farm value of production that is 43% less (25% less on a per acre equivalent basis) compared to the average value of production of all cattle farms. In the most recent data, average farm size for these older producers has dropped to roughly 75% of the average of all cattle farms. Previous data had indicated that farm size for the older producers was only 8-10% less than average. It is possible that asset turnover in the cattle industry has accelerated recently.

The combination of these producer demographics and the drought creates a unique situation in the cattle industry. The drought has forced many of these older producers to partially or totally liquidate their herds. Some of these older producers are not inclined to or will not be able to rebuild their cattle operations. The drought is forcing some producers to face the inevitable decisions about exiting the industry sooner rather than later.

At the other end of the producer spectrum are young producers trying to get started. The challenges for beginning producers have existed for many years but have arguably never been greater than now. Asset values are record high and the capital requirements greater than ever. The oversight of agricultural lenders under new regulations is considerably more stringent than in years past and adds to the difficulty of qualifying young producers for loans, even in cases where the lender is willing.

Cattle producers, perhaps to an even greater extent than farmers in general, view asset ownership as preferred and one of the marks of success in the cattle business. And yet, for young producers, asset control is what is important even if asset ownership is not possible. Leasing and other business arrangements may be more feasible and necessary for a new generation of cattle producers than asset purchase. One of the impacts of the drought is that older producers who have been forced to liquidate herds may be more interested in leasing land to younger producers and that may be a key to herd rebuilding and revitalizing productivity in the cattle industry.

In between the older and beginning producers are many producers who are simply trying to survive the drought and continue with their business operations. The majority of producers who have been forced to liquidate cattle have received good prices and did not lose a great deal of value on the sales. However, high feed and other input costs in 2011 and 2012 mean that producers have, in many cases, used the proceeds of drought sales to cash flow continued operations. These producers will likely face difficulties financing herd rebuilding when the opportunity arises. Replacement cow and heifer values will be record high. Producers must be careful during the drought to preserve enough equity with which to rebuild herds. Producers who haven’t yet done so should develop a drought management plan and a drought recovery plan which incorporates the business and resource requirements to survive the drought and be able to rebuild later.

The cattle industry today is smaller than it needs to be. The last two years of drought have preempted the beginning of herd rebuilding and pushed the industry to extremely limited cattle inventories. The drought holds the key to when, and to some extent how and where, herd rebuilding will take place.

At the same time, the economic environment of the cattle industry has changed dramatically in recent years. New demands on agriculture and rising crop values puts a stronger forage focus on the beef industry and has significant regional implications on where cattle production will be located.

The how, where and who of the cattle industry is changing in many respects but unprecedented cattle and beef prices confirm that market demand, both domestically and internationally, offers opportunities and will support rebuilding the beef cow herd, although to what level is as yet uncertain.