As if the past year hasn't been challenging enough for cow-calf producers and cattle feeders, 2009 will remain tough because of the global economic crisis.

The crisis will impact beef demand at home and abroad as governments continue to grapple with the credit crunch and recession. Supply and demand fundamentals will remain important factors in cattle-market performance, but the key drivers will be the economy and consumer confidence.

The latter is critical, as all wealth to the industry flows from consumers. Consumers spend 12% of their food dollars on meat, poultry and fish. Yet they faced 5.5% food inflation in 2008, the highest rate in 20 years. They face 4% higher prices again in 2009, says the federal government. Private estimates are that inflation could run much higher than that, particularly if corn prices spike again.

Corn will be the big wild card for cattle feeders. They got much-needed relief from sky-high corn prices later in 2008. But the U.S. struggled to put together a 12-billion-bu. harvest. It will have to produce the same or more in 2009 because of ethanol's increased use. So prices are likely to increase. The question is by how much?

Consumer confidence hit 38.8% last October, the lowest point since the Conference Board began measuring confidence in 1967. That came after consumers cut their spending 3.7% from July-September. Consumers, of course, are still eating, but they're changing their patterns of where and what they eat because of the economy.

The sit-down restaurant business is suffering as Americans transfer their food dollars from restaurants to grocery stores, where they realize their food dollars go 2.5 times further. Restaurants are hurting both on the top and bottom lines. Casual dining chain Outback Steakhouse suffered a $46.6-million loss for its quarter ended Sept. 30. Sales were down $61 million from a year earlier and down $100 million for the first nine months.

In contrast, McDonald's enjoyed 8% higher global same-store sales in October (up 5.2% in the U.S.). By the way, it buys one million metric tons of beef annually. Sales at food/beverage stores were up 4.8% in October. Big-box stores like Wal-Mart, Costco and BJ's, plus the largest conventional grocer Kroger, all fared far better than chains like Whole Foods.

Consumers are also trading down in their meat purchases. They're buying less expensive cuts of beef and more ground beef, and more pork and chicken. So middle-meat prices will continue to struggle while manufacturing beef prices remain strong (notably 50 CL trim from fed cattle). One factor here is that retailers are competing more strongly with fast-food chains for raw materials as they sell more ground beef and hamburgers, respectively.

Exports will be another key factor in helping boost beef prices and thus cattle prices. The global credit crisis has led to difficulties with lines of credit and to a meltdown of some currencies against the U.S. dollar, notably the South Korean won and Mexican peso. So export orders for beef and pork declined sharply last fall. Orders only began to recover in December. As a result, USDA trimmed its expectation for 2008 beef exports (they were still expected to be up 28% on 2007) and forecast that 2009 exports will increase only 4% from last year.

The credit crisis also led to a dramatic decline in cattle by-product values last fall. The main cause was reduced global demand for leather, so steer hide prices fell 20% from the end of August to the end of November. The overall by-product value fell from a July high of $12.12/cwt. to only $7.14 at the end of November.

That's a loss of more than $63/head, a value loss neither packers nor cattle feeders can afford. Both will need every penny if they're to make money this year.

Steve Kay is editor and publisher of Cattle Buyers Weekly (www.cattlebuyersweekly.com). See his weekly cattle market roundup each Friday afternoon at beefmagazine.com.