One Sick Puppy

Written on:November 1, 2010
 
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Published in The Stevenson Report
by Randy Stevenson

Rumor has it that some vet techs will write the abbreviation A.D.G. as the diagnosis of an animal they have briefly looked at and admitted into their care. Further inquiry enlightens us that A.D.G. simply stands for “Ain’t Doing Good.” There is scarcely a real cattleman that can’t look at a pen full of cattle and pick out the weak and sick ones. In both of these cases, the person doing the looking may not have had the opportunity to do a thorough diagnosis of the problem, but the general appearance and activity of the animal gives away the fact that something is wrong.

This same thing holds true of the cattle market. We can do a cursory diagnosis that there is a problem, without the precision to know specifically what is wrong. There are two particularly notable symptoms of illness in the market. Both of them require a very long-term
look.

The first is average return on equity. In most endeavors, the expected return that attracts investment is around 15%. More than that and the risk is higher than average, thus discouraging much investment. Lower than that and the capital goes elsewhere. Cattle producers earn paltry low single digit returns on equity when measured over the long term. It is not difficult to see that this puppy should be labeled A.D.G.

The second is the cattle cycle. The cattle cycle is the pulse of the market. It is the response of the ebb and flow of supply and demand streaming from production and consumption, in an environment of competition. If the cycle disappears, we know the puppy is sick. The predictability of the rebuilding phase of the cattle cycle has repeatedly been missed. It just isn’t happening. Obviously, something is wrong. The cycle has “flatlined” (or worse).

With these two significant longterm problems, we need to quit arguing about whether something is wrong and be much more concerned with an exact and correct diagnosis of the cause.

Email: The Stevenson Report jr549@wyoming.com


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