The story of growth in the U.S. livestock sector during the current crop price boom is varied than the story of rising crop prices.
Agriculture has experienced two recent periods of prosperity—the grain export boom of the 1970s and the post-2008 period. During both periods the livestock sector generally expanded meat, milk and poultry production, despite high feed costs.
Ohio State University economist Carl Zulauf and undergraduate student Nick Rettig have analyzed production of U.S. meat and livestock products, comparing the current period of high crop prices with the period of high prices in the 1970s. To measure change the economists compared boom period livestock production to benchmark average values for 1968-72 and 2001-05.
Overall, meat, milk and egg production rose in both periods, but beef production lagged both times.
Compared with average production in 2001-05, forecasted production for 2013 is slightly lower for beef (-1%), but higher for eggs (+7%), milk (+18%), pork (+17%), poultry (+12%) and all meat (+9%). Production in 1980 also was generally higher than in 1968-72, with beef again having the smallest change.
Year-to-year changes in livestock production generally have been smaller during the current period of farm prosperity than during the 1970 period of prosperity. For example, standard deviation of annual production changes, a common statistical measure of variation, was at least 50% lower during the current period of prosperity for each meat and livestock product.
"The reasons for this increased stability in livestock production are not known," says Zulauf. "But a factor could be the large decline in number of livestock producers. The farmers who have remained in livestock production likely reflect, in part, a strong commitment to livestock production. Otherwise, they would have exited. Plus current livestock farms average a larger number of animals, which implies a greater financial commitment to livestock production. The net result is that current livestock producers are probably less likely to stop or reduce production when profits face pressure."
At least as of year eight of the current period of prosperity, the U.S. livestock sector has, in general, continued to expand production. The economists did not mention it but widespread drought appears to be holding back growth in the beef segment, which is highly dependent on grazing and forage growth.
"Obviously, the period since 2005 has been difficult for many livestock producers," notes Zulauf. "The likely reconciliation of the apparent conflict between financial stress for many livestock producers and the observed rise in livestock production is cost economies of size. The existence of economies of size means that the largest livestock producers may earn a profit even when the average return for all livestock producers is negative because their lower costs allow them to earn a profit. The highly efficient producers can grow and expand total production, even when the average producer is losing money. Higher feed costs and expanding ethanol production may have exacerbated the stress associated with this structural shift in livestock production. But they are not likely the root cause.
"The continued expansion of the U.S. livestock sector in a period of high feed costs bodes well for domestic livestock feed demand when crop prices do decline in the future," concludes Zulauf.
"Economies of size are likely a key part of the explanation, though not the only part--just as economies of size were one force fueling the 1970s expansion in broiler production," says Zulauf. "Economies of size give a larger producer an advantage. But this advantage may not be enough to survive, as other factors may override the economies of size.
Before you conclude economies of scale always give larger producers an edge, remember that Pilgrim's Pride, at one time the nation's largest poultry producer, experienced extreme financial difficulty early in the most recent stretch of farm prosperity.
Remember, too, that the Standardized Performance Analysis database of real ranch data in the Southwest has shown for many years that the largest operations are sometimes, but not always, the most profitable.
A more appropriate conclusion might be that changing times provide opportunities for skilled risk managers to gain an edge.
Management of each firm make the difference
A difference always exists between understanding what is happening to an individual producer and what is happening on average at the level of the sector.
Estimated returns to farrow-to-finish hog operations based on spot cash hog prices, spot cash corn prices and spot soybean meal prices show many more months with losses than with profits since 2008. Trade talk suggests that pork producers have become more adept at managing risk in recent years. That suggests "average" margins reflect larger losses than those experienced by the more skilled risk managers in the pork industry.
"Managing risk in and of itself, where risk is defined as variability, is usually an important adjunct to expansion," explains Zulauf. "But the search for higher profits is likely to be the primary motivator for expansion. Skill in managing risk can clearly be a key to surviving when change is occurring, whether or not expansion is occurring."
Profitability is one expansion driver. Skill in managing risk and variability is another. They are interrelated, but are also different.
"Another explanation of some of the change in livestock production could be expansion by producers who grow their own feed," explains Zulauf. "While they have the cost of growing the crop, this cost is generally less than buying all feed, especially if the land is already paid for."
However, this situation is also likely to lead to some producers who buy most of their feed cutting back or going out of production. Thus, it is not clear that this factor would lead to higher output at the sector level. Nevertheless, Zulauf thinks it is possible that this factor could also help explain the expansion in livestock production during a difficult economic time for livestock producers.
Otte is economics editor for Beef Producer and Farm Futures magazines.