Thursday, April 10, 2008

New Competition for Beef

While traveling in Kansas this past week I had the opportunity to meet with several cattlemen and feedlot managers. The mood among them is somber to say the least. The market doesn’t seem to be adjusting to the realities of the new energy economy very quickly.

Transportation cost is one of the biggest factors impacting every industry across the country -- especially livestock feeding. When trucking companies are dealing with diesel prices in the neighborhood of $4.00/gallon, the cost of moving grain or animals or boxed beef becomes significant. If calves are being shipped from the Southeast to feedlots in the Plains, the cost of transportation must be figured into the price of those calves. The same issue affects corn – if it can be purchased at all.

On the other end of the supply chain we have the consumer. When gasoline prices are at record levels, groceries is one area where household costs are cut. We should be looking at ways to drive less or improve fuel efficiency but instead, we cut back on spending for higher priced food items such as beef. We don’t give up our gas guzzling habits very easily.

The result is that packing plants are looking at cold storage filled with boxes of unsold beef; the feedlots are looking at cattle that need to go to market but the packing plants aren’t willing to give them a price at which the feeder can make any money; cattle feeders are unwilling to buy calves to put on feed – and on and on. It all is driven by fuel in one form or another.

What is driving the fuel prices? I am amazed that our Congressional leaders in all of their wisdom feel compelled to bring the heads of multiple oil companies to Washington to berate them over the cost of fuel. Of course, most of the Congressmen and Senators don’t have much training in economics. In fact, I think they must be trained in anti-economics – or at least anti-free enterprise. Most of the laws coming out of Washington seem to hinder business rather than help. The cost of every regulation and every hair-brained pork-barrel scheme gets passed on to the consumer in some form or fashion. Sometimes it is a direct tax but more often than not, it as an indirect tax created through regulatory action on business.

It is the growing economies in India and China, domestic regulations concerning fuel additives, mandatory targets for bio-fuels, market uncertainty due to political unrest, burdensome regulation on building new refineries and infrastructure, the high cost of building refineries, environmental regulations, closure of certain areas to oil exploration, the devaluation of the dollar, and all of the other global factors that impact the energy business that are driving fuel prices. Why do we think we can solve the problem by making ethanol from corn? Oh, and did I mention the booming economies of India and China? A few hundred million individuals with the most disposable income at their finger tips that has been seen in those countries ever – want to spend it on some of the finer things in life – like automobiles and meat.

Our consumer spending habits are enabling those countries to build thriving economies that produce goods that must be transported to the U.S. by ships burning diesel. I’m happy their economies are growing. We just have to realize that we are paying for that growth.

The current ethanol mandates drive up the price of corn. That’s really all they do for our energy situation. Has the price of gasoline come down? The high price of corn was good for corn farmers – last year. The cost of farm inputs has now normalized (adjusted) due to the higher fuel costs and the margins for farmers will be much slimmer this year. Their business is extremely fuel intensive. Their input costs – such as for fertilizer and diesel – have gone through the roof.

The mandates are hurting cattle producers. They are suppressing demand for beef because now – put this in your pipe and smoke it – beef is competing against energy. The consumer dollar will choose energy over beef because of the need to heat and cool our homes and drive to and from work. In the past, beef competed with pork and poultry. Now it must also compete with energy because the primary cattle feed ingredient is being converted to fuel.

Isn’t it great what misguided regulations do for you?


WomanHonorThyself said...

misguided regulations!..dont get me started!:)

cowboy55 said...

It may create a new war - farmer vs. cattlemen!

Chris McClure aka Panhandle Poet said...

Cowboy: I'm not sure that war is particularly new....

Americaneocon said...

Nice posting!

An interest aside is that in all the talk about recession, people are not blaming high gas prices.

People are paying more to get around, and if that's pushing up supply costs, we'll have to pay for that as well. I haven't read of a decline in demand for beef, but let me know from your end.

I too think that growth of other economies is a good thing.

Hope you're well!!

Sue said...

Isn't this what a capitalist market is about, consumers making choices about what they want to use their money for? And, in a capitalist market, some businesses fail, if beef farmers fail, because there is a lack of demand for their product, what's the harm in that? Can't they see it's creative destruction, and thta they just have to make way for new forms of investment (like the steel workers did in the 1980's)?

Chris McClure aka Panhandle Poet said...

Sue: You're comparing apples and oranges. Beef producers will adjust and recover because they do operate in one of the freest, most capitalistic markets left on the planet. What is sad is that misguided federal mandates are eroding that market.

Sandy Kessler said...

The trucker - wow I cannot even imagine

Anonymous said...

You get my vote for a well written and succinct analysis here.

Politicians are driven by their own self interests. They don't care what the consequences of their actions are for hundreds of thousands of people if it gets them a 15 second sound bite on the evening news.