What SHOULD a cow cost? I don’t know. But I think it’s worth figuring out…cause I don’t have enough cows and I also can’t afford to waste cash. It’s not that 11 cows aren’t enough for me, personally. It’s that 11 cows aren’t enough for 60 acres. But I’m afraid this blog post can’t answer the question. It can only explore the idea.
In Feb. of 1976 live cattle were selling for $0.42. If you want to use the BLS Inflation Calculator, start in 1976 with $0.42 and you’ll see the current price should be $1.71. But cattle are selling for an all-time high price of $1.40. So…does that mean cattle are behind on inflation? Maybe we started at the wrong place.
OK. 1981 was a particularly bad year for inflation. Let’s start with 1982. Cattle were $0.62. Start the BLS calculator in ’82 with $0.62 and it will calculate $1.50. We’re still not there.
And that’s what I do with my free time. I didn’t spell it out longhand, I just gave you a handy link. But I could show you my work if you want. My junior-high math teacher would be shocked. I think an 11 year old me would be shocked.
February cattle are listed on CME at $1.40. That means cows are currently priced 7 years behind inflation (if you base on the 1976 price). So are cattle expensive based on historical prices or are cattle discounted compared to official inflation statistics? I don’t know. I really don’t. But I tend to think a 1976 cow is reasonably comparable to a 2014 cow. Actually, I might pay more for a straw from a 1976 Shorthorn Bull as he’s probably closer to grass than most of the currently available breeding stock. Maybe that’s why modern cows are slightly discounted…they aren’t as good.
Let’s approach it a different way. My farm in 1976 was basically the same as it is today. The same sun shone overhead. Similar rainfall patterns were observed. But in 1976 average farm values in Illinois were $1,062 ($4,347.98 adjusted for inflation). 2013 average Illinois farmland prices are $7,900. Carrying the math forward from the BLS page referenced earlier indicates land prices are currently priced 15 years ahead of official inflation!
Let’s try again. In Feb of 1976 the S&P 500 was at 99. Today it is at 1838.06. It is now where inflation should have carried it by 2050. So is the S&P priced 36 years ahead or is everything else behind the times?
Maybe I’m looking at it all wrong. Maybe the “official” rate of inflation is understated. Maybe it is more like 6% or 8% as reflected in land and S&P. Then again, maybe demand for cattle is simply down and/or worldwide supply is up so prices are down compared to where real inflation rates would lead us to believe they belong. I don’t know. I’ll keep trying.
An ounce of gold is exactly the same as it was 38 years ago. No rust, no insect damage, it hasn’t gotten stale…no difference whatsoever. In Feb of 1976 an ounce of gold cost $130. Today (as I write this) an ounce goes for $1252. That means either gold is currently priced in 2040 dollars or real inflation is in that 6% – 8% range. If the S&P and Gold give a true picture of inflation, land could be 9 years behind the curve! Cows would be even further behind!
But I don’t care if the official inflation rate is the real inflation rate or not. I see the threat and have to work to preserve and grow my limited amount of capital. I have to plant my money where it will grow. If cows are at an all-time high…well…what goes up must come down. But if cattle are priced behind the centrally planned destruction of the dollar…well…maybe there is an opportunity. If real estate has gotten ahead of inflation maybe it’s time to rent. Maybe I should convert my 2050-priced stocks and my 2029-priced land into 2014-priced dollars to buy 2007-priced cows! I don’t really own any stock and I’m not selling the land. Anyway, I paid a price for my land that reflects the past, not the future…because the market was less crazy when I originally bought.
So I guess it comes down to faith. Do you believe the Federal Reserve will work to continue inflationary policies? Do you think they will be successful? Do you think people will still want to eat beef in the near future? Do you think that beef will necessarily come from North America?
Those last two are difficult and are at the heart of my recent post on lowest cost production. However long the time horizon, will beef be seen as a luxury item or as a necessity? More about this another time.
How much is a cow worth to the future of the farm? They really do a lot of work for us. $1.40? I don’t know. They create a lot of work too. Does the farm present other opportunities that are priced at a larger discount? I may have to scale back my herd expansion plans and focus on growth in other areas…at least in the short term. I mean, the labor participation rate is the lowest it has been since 1977. Land prices are higher than they have ever been. Cattle are higher than they have ever been. The S&P is higher than it has ever been. High prices and high rates of unemployment are not compatible. Will prices come down before employment goes up? Will my own employment rate go down? What happens then?
So back to the original question. What SHOULD a cow cost? Which is another way of asking, “Is this the right time to buy cattle?” I don’t know. That depends. It may depend on faith. How much faith do you have? Faith in the Federal Reserve? Faith in the hamburger? Faith in the Almighty.
One final note:
If you find errors in my math, don’t bother telling my junior-high math teacher. She’ll just roll her eyes. Again.