First appearing in Farm Progress, this article by University of Missouri Extension Ag Business Specialist Wesley Tucker was graciously allowed to be reprinted by Farm Progress.
There is an ongoing debate about whether men who are economists wear boxers or briefs. The reality is we wear Depends. (I have two degrees in agricultural economics, so I qualify as an economist and hopefully get by sharing this joke.)
While that may be a bad dad joke, the No. 1 question I’m asked as I travel the country is, “Should I be growing my cow herd?” And my advice truly is, “It depends.”
Cattle prices have soared into the stratosphere, creating profitability in the cow-calf sector none of us ever dreamed possible. But if there’s one thing we have learned from history, it’s that the cure for high prices is high prices. This leaves producers scared good prices won’t last and questioning whether it’s wise to expand.
The answer is it primarily depends on what your neighbors choose to do.
GAME THEORY CAN HELP WITH STRATEGY
Game theory is the study of strategic decision-making. It analyzes the choices rational people make when faced with cooperative or competitive scenarios.
In cooperative situations, people usually work together for common goals. However, in non-cooperative situations, people act independently, making choices for their own benefit — potentially at the expense of others.
A wonderful example of game theory can be seen in a late-2000s British game show called “Golden Balls.” In the final round, two strangers decided whether to split or steal a large sum of money. After discussing their plans, each player secretly made their selection.
If both chose to split, they equally shared the money. However, if one chose to steal and the other chose to split, the one choosing to steal got all the money. If they both chose to steal, neither one got anything.
What does game theory have to do with the cattle markets?
Whether now is a good time to expand your cow herd depends on what all your neighbors, like those in the game, choose to do.
HISTORICAL PAINS IMPACT DECISIONS
Two years ago, when prices began climbing rapidly, producers kept asking me when the bottom was going to fall out of the market. Why was that?
It’s because they vividly remembered how rapidly prices rose in 2014 and 2015 and then how quickly they crashed.
I wish I had a dollar for every time I’ve heard a producer say, “I can’t afford to keep heifers at this price.” In reality, that statement was likely false. Most producers could have chosen to sell only their steer calves, and their check may have still been bigger than ever before.
What they were actually saying was, “At these prices, I don’t believe the market will stay this good for very long. So, I think I’m better off selling this heifer calf instead of breeding her.”
Producers remember saving those expensive heifer calves in 2014 and 2015 and watching their value continually fall afterward. Back then, we expanded way too rapidly as everyone saved too many heifers and held onto too many old cows.
In essence, everyone chose to steal, and we all suffered because of it.
CURRENT CATTLE DYNAMICS
When the Jan. 1 cow and heifer inventory numbers came out, many market analysts were quite surprised expansion had not begun.
Historically, profitability would have triggered producers to save heifers and begin expanding. However, for two years, I felt this cattle cycle would be different than previous ones.
Today, there are many headwinds hampering expansion, but one of the biggest factors is simply how brutal the market crash of 2016 was for cattle producers. The pain of that experience was seared into people’s memories and is affecting current decisions.
Back to our game show example: By not expanding for two years, everyone has chosen to split, which has created an extended period of exceptional prices lasting longer than many expected.
So, should I be expanding? Game theory says it depends on what you think your neighbors will do this year.
If no one chooses to expand, everyone gets to enjoy a cattle cycle that stays better for longer. But if you believe others won’t expand, there is significant incentive to steal by expanding your own herd rapidly.
Unfortunately, if everyone chooses to steal by expanding quickly, we could repeat 2016, and we all lose. Decisions, decisions, decisions.
Next month, I plan to dig deeper into expectations and the forecasts of future returns for today’s heifer calves as they become cows. Plus, I’ll discuss how improving consumer beef demand may be changing the game we are playing.
Today’s prices are not solely a result of low supply. Consumer demand may be altering the rules of the game.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $246.87 per cwt to $249.74, compared with last week’s range of $245.55 to $252.00 per cwt. FOB dressed steers and heifers went for $388.13 per cwt to $389.29, compared with $386.05 to $397.06.
The USDA choice cutout Tuesday was down $0.66 per cwt at $388.90 while select was up $0.18 at $388.78. The choice/select spread narrowed to $0.12 from $0.96 with 85 loads of fabricated product and 13 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $446.75 per cwt, and 50% beef was $193.11.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.08 to $1.20 a bushel over the May corn contract, which settled at $4.65 1/4 a bushel, up $0.04 1/2.
No live cattle contracts were tendered for delivery Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $369.62 per cwt, up $0.28. This compares with Tuesday’s Apr contract settlement of $372.07, up $1.50, and May’s $371.72, up $4.27.