It’s an annual event – a year-end discussion with Steve Kay about the state of the industry.  Steve has been editor and publisher of Cattle Buyers Weekly for a quarter century. He’s recognized around the world as an authority on the North American meat and livestock industry, speaking often to industry groups in the U.S., Canada, Australia and a few other places.

He can be counted on for characteristically blunt but well-versed comments about the cattle industry.  Whether he’s offering praise or questioning motives, he backs up what he says and writes with the facts. 

This year brought the usual avalanche of important issues to discuss; too many, as usual, for a quick five minutes discussion and he’s a hard man to corner.  I emailed a few questions to him and asked him to respond.  His answers came back quick, pithy and to the point.

Q. Steve, let's talk about some of the most recent events first. A long list of trade associations led by NCBA, the governors of eight states and 181 members of congress petitioned the U.S. Environmental Protection Agency to suspend rules that mandate a minimum blend of ethanol in gasoline. The EPA said it had not found sufficient evidence that support the finding of severe "economic harm" required to warrant a waiver, and that waiving the rules would have little effect on corn prices anyway. Two dozen academics and scientists testified for the waiver and it was opposed by the National Corn Growers Association. Was the EPA decision justified?

A. No, but it was to be expected. The damage to the livestock and food industry due to ethanol mandates has been real. Higher corn prices have led to reduced cattle and flat hog numbers and therefore to higher meat prices for end users and consumers. But USDA and the Administration have repeatedly refused to acknowledge the relationship between ethanol mandates, higher corn prices and their impact on industry size. EPA followed that line and chose to support USDA’s economic analysis rather than any independent studies on ethanol’s impact on corn prices.

Q. ABC News entered the beef business when reporter Jim Avila went after BPI and what he insisted on calling 'pink slime.' Lean finely textured beef, already abandoned by major fast fooders like McDonalds after the Jamie Oliver spectacle, was quickly dropped by even more businesses and retailers that blended it into their products, causing a disruption in beef prices. Not long ago, BPI struck back, announcing a billion dollar law suit against ABC. What has been the effect on the beef business and will BPI's suit help or hinder the industry?

A. The first effect was that the price of fatty trimmings from fed steers and heifers (50CL) plummeted after the ABC stories to a weekly low of $51.03 per cwt, while at the same time the price of lean trimmings (90CL) the same week put in a record high of $231.20. The loss of LFTB, which comes from 50CL beef, meant less lean beef was available to consumers as more 90CL had to be blended with 50CL. Both the price of regular and lean ground beef at retail moved higher, another negative for consumers. Given that more than 50% of all beef in the U.S. is consumed in ground form (from fresh to hamburger patties), the higher price of the raw material and prices to consumers is a big blow to beef’s competitiveness with other proteins.

BPI’s lawsuit might not succeed because defamation is notoriously difficult to prove. Some legal scholars, however, say they are surprised by the large amount of evidence that BPI provided in its lawsuit suggesting that ABC recklessly caused BPI’s business to be damaged. Whatever the suit’s outcome, the beef industry’s battle against deliberate “disinformation” campaigns has been strengthened by BPI filing its suit. BPI’s suit has given pause at least to other media outlets over their coverage of the U.S. livestock and meat industry.

Q. Last year, we talked about the great drought and what it was doing to the cattle business. This summer, I toured some of the cattle regions of Kansas, Oklahoma and Texas and it looked grim. The drought has expanded from that heartland area to encompass a much larger piece of American agriculture. What is it doing to the cattle business?

A. Both droughts have had a profound impact on the business in terms of declining cattle numbers, higher feed costs and reduced producer profits. The result meant a sharp decline in calf and feeder cattle prices this summer (they have since recovered) as producers were forced to sell animals. The drought has wider implications, as national herd numbers are expected to be below 90 million head on January 1 next year.

It’s startling to realize that the U.S. has lost 14.5 million cattle since 1996. This is putting considerable pressure on feedlots’ ability to remain open, and we could see similar pressure on several beef processing plants next year or in 2014. Allied industries that depend on cattle numbers to sell a certain product volume are also being impacted. Even worse, it appears that cattle numbers might not stabilize until 2015.

Fewer cattle numbers mean the industry will have to take more costs out of the production system so that producers can make more money per head to balance the reduced numbers in their herds. This might also mean that some margin operators (for example, those who buy young cattle, background them and sell them on) might find it difficult to achieve a margin. Fewer cattle will probably move through fewer hands for the next three years.

Q. The U.S. cattle herd continues to decline and consistent beef demand has helped create record-high cattle prices. We're not seeing dancing in the streets, though, just hearing a lot of concern. What's the problem?

A. Tighter cattle supplies, not beef demand, have primarily caused the record high live cattle prices and people are worried about consumers’ ability to keep paying record high prices for beef at retail and foodservice. Second, those record prices have not covered cattle feeders’ increased costs, notably of corn. So their margins, at least on a cash-to-cash basis, have been heavily negative all year.

This significant erosion in cattle feeding equity could have impacts in two directions. Higher live cattle prices are necessary but they will force wholesale beef prices higher as well, making beef even less competitive with competing pork and chicken. At the same time, continued cattle feeding losses would put a ceiling on feeder cattle prices even though supplies of those cattle are declining. In short, the declining herd numbers are bad news for everyone from producers to consumers.

Q. From where I stand, I see the two parties still playing chicken with the fiscal cliff. Not much has been said about the new farm bill, though. Will it happen during the first quarter? And what good news/bad news might it bring to the beef industry?

A. We will eventually have a new Farm Bill - although no knows quite when – possibly in April. Whatever it contains, there will be little or nothing in it to directly affect the industry. It should focus its attention on the regulatory front, to ensure the industry is not saddled with even more rules that stifle people’s ability to operate profitably.

Q. The use of antibiotics in animal agriculture is always around; sometimes at a slow simmer, often at a full boil. It's an issue that's heated up a bit this fall. How should the cattle industry handle it?

A. The industry needs to get much more personal and in the face of Americans. I suggest a massive social media campaign, using real producers on their ranches, with this kind of message: “I have three kids and they get sick occasionally. We go to the doctor and get an antibiotic because I hate to see them with pain. I stop using the antibiotic as soon as my kids are better, especially as the medicine is expensive. I use exactly the same approach with my animals. And I rigorously follow all government guidelines about antibiotic use because I am just as concerned about their over-use as you are.”

Q. Last question - CN has thousands of readers. What would you like to say to them?

A. Support your national cattle organizations and speak up yourself wherever possible, as the battle over antibiotics, animal welfare and other issues will only intensify in the coming year. Try to expand your beef cow herd, if you have one. Tell your banker his loan will be an excellent investment, as global beef demand will outstrip available supplies for the foreseeable future. Cattle will be the new hot commodity.

The opinions expressed in this commentary are solely those of Chuck Jolley, a veteran food-industry journalist and commentator.