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Beef: A Bright Spot in the Ag Economy

By Bill Poquette, Editor-in-Chief

Tom Jensen is senior vice president, ag lending at First National Bank of Omaha, which is ranked as the 10th-largest U.S. ag lender with markets in Colorado, Illinois, Iowa, Kansas, Nebraska, South Dakota and Texas. In mid-September, Ag Banking Editor-in-Chief Bill Poquette visited with him about the beef segment of the agricultural economy. The following is based on that conversation, edited for length and clarity. He is a board member of CattleFax and relied on research from their information and analysis service for his comments.

How would you rate the overall health of the beef industry as 2018 winds down?
In 2016 we went through just a disastrous time period, a time of huge liquidity drains. In 2017 we rebounded, and it was one of the few years that the whole sector made money — the cow-calf operator, the backgrounder, the finisher and the processor. We really had a strong year in 2017 and that carried over into the first half of 2018. We continue to see margins at record-high levels for the meat processors and the feedyard industry and the cow-calf operators continue to make some money.

Now, as we get into the back half of this year, the feedyard trade will lose a little bit of money, but overall I’m guessing that 2018 will be a break-even year for them. This isn’t bad considering how profitable it was in 2017. We’re on pace to have a record year for exports in spite of the trade wars that are going on. The export side is really helping drive demand for the beef industry. Reflecting on what has taken place with the overall economy, demand is good domestically as well.

What are the major competitors for beef now?
I would say the other proteins. One thing that the beef industry needs to watch is what takes place with what I call “fake” meat. A lot of companies, even some of the processing companies, are spending a lot of money to develop proteins that aren’t traditional. And if you look at what happened in the dairy industry — almond milk I think represents 15 to 20 percent of consumption today. I could see that taking place in the beef industry as well. Or the meat industry, not just the beef industry.

What are the industry’s biggest challenges?
One challenge the agricultural industry has overall is help. Who is going to work in these ag jobs, whether it’s livestock, dairy operations or just farming? When I talk to our customers they are very concerned about trying to recruit people who want to do agricultural jobs. We recently had an ICE raid in central Nebraska and some of our customers were impacted. One is a feedyard, where 25 employees were taken away. Where do you find 25 employees to feed the cattle? Both parties, the Democrats and Republicans, need to come together and say OK, how are we going to fill these jobs? We are at full employment, and these are the jobs that are least appealing to people.

Will trade policy affect producers’ export strategies?
I think it’s going to impact the pork industry first and then the beef industry secondarily. Mexico is our largest or second-largest export market. Another thing that helps is countries taking different cuts that we don’t necessarily consume in the U.S. So we’ve got to have trade deals. Eighteen percent of beef production is exported, 25 percent pork production is exported. If we lose those markets, the whole livestock industry, the whole protein industry is in serious trouble.

Is this trade policy going to affect input costs?
I think in the short run it actually may be a little bit positive. But if we’re not exporting as much soy meal and corn it will have to be used on the domestic front, which will cheapen it. Cheap grain makes cheap livestock, which isn’t good for anybody.

Is the consolidation trend in ag affecting beef producers?
Definitely. The top 20 producers continue to control a greater and greater percentage of the cattle on feed. I would say 70 percent. We haven’t seen as much with smaller feedyards and ranchers as we’ve seen with the bigger yards. I would say the farmer-feeder of yesterday continues to evolve and get bigger and bigger. So does the farmer who was feeding 3,000 head 10 years ago, who is probably feeding 20,000 head today. The pork producer that had 1,000 sows may have 10,000 sows. So consolidation is continuing, and in my mind it’s actually accelerating because of the cost of capital. In my opinion it is not good for the overall industry.

Do you see any red flags ag lenders should be looking for?
I think liquidity continues to be the driving force. You want to make sure you work with customers that have liquidity. I think land values are going to continue going down, and interest rates are going to continue to go up. Net farm income is continuing to turn down, and we’re going to get what looks like another huge crop so grain prices are going to struggle for the foreseeable future. Everybody talks about the ‘80s. Well, in the ‘80s we were charging 24 percent interest to customers. Now we’re charging 6-7-8 percent. And the asset values aren’t going to decline as precipitously as they did in the ‘80s. I don’t see that, but I don’t see a huge opportunity for lots of profits.

You’re going to have to be a good manager. Producers on the grain side don’t like to talk about this, but they had opportunities in the summer to get $4 for corn and passed on it. So now they are going to sell it at $3.20 or $3 at harvest time. We put a heavy premium on selling your product at a profitable level. But I’ve been doing this for 40 years, and I’ve taken commodity brokers out to these small communities many times to talk to producers, and I don’t think we’ve made any progress as far as doing a better job of selling the crop. They still wait until they get it in the bin, and then they start thinking about it.

What kind of technology is being used in the beef industry?
Agriculture is kind of behind a lot of industries, but we’re all going to have to embrace technology to gain efficiencies and do things better. I think there are ways to do things more efficiently, whether it’s turning on your irrigation systems with a smartphone or using drones. Some have used drones to count cattle, but we haven’t. I’ve heard that if they fly low enough they spook the cattle. We’re looking at that, and at counting with satellites. Today’s inspectors are 60-some years old, and they’ve traveled a million miles. Who wants to be an inspector for the First National Bank? One day you’re in Amarillo, Texas, and the next day you’re in Fargo, N.D. That’s a gypsy job.

You’ve done that.
I have. And I’m glad I’m not doing it anymore.

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