Managing the economics of cattle ranching is key
“To this day, no one wants to talk about economics when it comes to ranching,” said Stan Bevers, owner of the ranch management company, Ranch KPI LLC.
Bevers, who also has an appointment at King Ranch Institute for Ranch Management with Texas A&M University, consults a number of ranches on their finances. He says there are two important financial planning matters in cow calf ranching people should understand.
“One of them is what resources they have, which is our carrying capacity relative to stocking rate,” he said. “The second thing is the economics of it. Underneath all this stuff, I have fixed costs.”
These can include labor, machinery, depreciation, repairs and property taxes. He says many times stocking rate has to be a certain number to support fixed costs structure.
“Our fixed costs have gotten so expensive that now we have to have a fixed number of cows,” he said. “It’s not because that’s what daddy and granddaddy always ran on this place, although that tends to be part of the fixation for some of us. Now you have to have that many cows just to pay the property taxes.”
Additionally, inflation often makes profit margins slim.
“I don’t care how efficient you are, at some point inflation just kills you,” he said. “Cow calf is not a margin business. It is an asset management business.”
When it comes to market fluctuations, microeconomic theory says that price will rise or fall to meet marginal cost. If price goes up, costs will follow it. One example Bevers gives is the price of vehicles. When the price of cattle went up in 2014 and 2015, other industries wanted a piece of that pie so input prices increased. However, the oscillations do not always mirror each other.
“The problem with microeconomic theory is it doesn’t always work,” Bevers said. “Cattle prices have gone down, but the price of pickups continues to increase.”
Prices, prices, prices
“I want to be optimistic about cow calf prices through the next few years,” Bevers said. “I know we’ve been at the bottom, but hopefully we’ll start to see prices increase.”
He says 2019 was the first year in modern history that pork has out produced beef. China produces 49% of pork on the planet; however, with African swine fever ongoing in China, Vietnam and the Philippines, stressors are being placed on pork production.
“Right now the common estimates are Chinese hog production has decreased, because of African swine fever, between 40 to 50%,” Bevers said. “Some people say that’s incorrect and it is closer to 70%. That’s 35% of the planet’s production of pork that has gone away.”
He says with this perspective, the recent trade deal with China is incredibly important. Ultimately, these countries are going to need pork and ramping up exports will help the beef market’s demand.
“We’ve got to get this protein delivered to the consumer whether it be beef, pork or poultry,” he said. “In 2018 and 2019 we finally got exports higher than imports. The expectation for 2020 is even higher exports.”
2020 is expected to continue testing producers, but proper ranch accounting could be the difference in hanging on and shutting down. Bevers says the three items ranchers must consider when it comes to the success of their operations are productivity, costs and the vagaries of the market. The only one the rancher can control is costs.
“Any rancher or producer has no control over the average price of cattle,” he said. “What they do have control over is whether they are above or below the average.”