Beef industry has limited ability to expand very quickly
Cow-calf producers, like most in the cattle industry, have been on the defensive for the past three years. First buffeted by unprecedented high feed and other input costs in 2007 and early 2008, profitability remained weak as cattle prices collapsed under the weight of the recession and poor beef demand this past year. Poor profitability stalled out the fledgling cow herd expansion that began in 2005 and by 2007 the cow herd was declining.
That sets up the situation in late 2009. Beef production is decreasing and projected to continue decreasing for a couple more years. Several macroeconomic indicators suggest that the worst of the recession is behind us and that we should see recovery that leads to improved beef demand in the next few months. The timing is, of course, uncertain. The macroeconomic signals are a mixed bag right now. The stock market has made a significant recovery from the low in early 2009. GDP growth was positive in the third quarter is likely to show growth, albeit modest growth, in 2010. However, unemployment is still rising and likely has not peaked yet. Consumer spending remains limited as consumers work to repair their balance sheets. Recovery of beef demand depends on consumers having the financial ability to purchase more beef, along with other things. The good news is that beef demand is fundamentally sound. Consumers still want to purchase and eat beef and they will as soon as they can afford to. That will lead to higher prices and the incentive for the beef industry to expand production when it occurs. This scenario is likely to kick in sometime in 2010 and could be relatively strong in the last part of the year.
However, because of the current herd inventory situation, the beef industry has limited ability to expand very quickly. The initial stages of expansion will pull even more heifers out of feedlots and further squeeze beef production. The beef herd expands or contracts on a more or less annual basis due to the seasonality of forage production. It is unlikely that the recovery described above will be in place and obvious enough for the beef industry as a whole to begin much expansion in 2010. However, individual producers may well want to think about how to be positioned for beef market opportunities in the next year without necessarily committing to an aggressive expansion until the macro picture clears a bit better.
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