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Profitability in the beef industry is influenced by many factors, but none more so than the number of consumer dollars coming into it for our products.
The beautiful thing about economics is that it is still part art and not all science. Look hard enough and you can always find an economist to support your view. In fact, a lot of economic reports are created to justify a market position or view, rather than to accurately forecast or explain the market. Still, there’s always a lot to be learned from these economists.
When I worked at CattleFax, there were certain people who were must-reads and I learned a lot from them. However, you always had to keep in mind the paradigm through which the individual was looking at the world. Some are almost always bearish, others almost universally bullish.
It’s been a very difficult recently to be a dyed-in-the-wool bear regarding the industry. Eventually, they’ll be right again, but it’s been a difficult run of late. Conversely, the bulls look brilliant today. That doesn’t mean that the bears are wavering, however; in fact, they’re getting more vocal.
The crutch of the bears’ argument is something like this – the higher prices we’ve enjoyed the last 18 months are great but unsustainable. They contend that for the long-term health of the industry, prices must and should decline.
What doesn’t add up for me is the claim that consumers can’t afford, or are unwilling to pay for, our product at current demand levels. Nonetheless, beef demand actually grew this year, while pork and poultry have faced a harder time.
The bears point to the declining number of cows, fewer producers and lower per-capita consumption, and lament a contracting industry. They claim that the key to building the industry back is to lower prices.
First of all, per-capita consumption tells a lot of stories, but it’s not an indicator of demand. Domestic per-capita consumption is simply production minus exports, divided by the number of people. While per-capita consumption is negatively influenced by population growth and growth of exports, that’s not necessarily a bad thing from an industry or producer viewpoint.
Supply is the other big factor driving the consumption number. As my ex-boss used to say about beef consumption, “They’ll eat whatever we produce (they don’t throw it in the ocean); the only question is at what price will they consume it.”