Prospects for the beef industry in 2010 are a bit like a beef stew. Some of the ingredients aren't very appetizing on their own. But add a spoonful of slowly improving demand and the year looks much more appetizing than the one just passed.
The full throes of the U.S. and global recession were yet to appear this time last year. So cow-calf producers and cattle feeders looked forward to higher prices because cattle supplies were down. But the recession was deeper than forecast and severely impacted beef demand at home and abroad. The demand weakness trumped tighter cattle supplies and more losses resulted. That's why improved demand is key to producer profitability this year.
Meanwhile, trade restrictions and outright bans still hinder U.S. beef exports. At home, E. coli O157:H7 still hangs over the industry. The pathogen last year forced the industry to defend itself against a new breed of advocacy journalism and members of Congress who have called for new food safety rules.
Negative margins, and drought in some areas, caused cow-calf producers to continue to trim their herds. Market-ready supplies of fed cattle will likely decline only slightly in the first half of 2010 but then tighten further in the second half. This could herald higher prices for cattle of all classes, should demand improve as expected.
Higher exports projected
The recession caused exports in 2009 to decline, despite a weak U.S. dollar. A November USDA projection put exports for the year down 3.3%. January-October data show volumes down 12% and value down 18% vs. the same period in 2008. Much of the decline was in beef variety meats. USDA in November forecast that exports this year will be 5% higher than in 2009.
Japan was the bright spot in 2009, with volume and value up 22%. Further increases this year will largely depend on whether Japan agrees to relax its age restriction on U.S. exports. The U.S. government has urged Japan to lift the restriction; currently only beef from cattle under 21 months of age can be shipped. The industry wants the federal government to accept an under-30-month restriction as the next step. This would qualify for export 90% of all cattle slaughtered in the U.S. Japan in 2009 showed little interest in discussing the subject, but the U.S. is likely to press harder this year on the issue.
Beef exports in 2009 were also up to Taiwan, Hong Kong and Vietnam. But they were down 28% in volume and 36% in value to Mexico, down 10% in volume and 15% in value to Canada, and down 47% in volume and 69% in value to Russia. Business is likely to improve to Mexico this year, but exports to Canada and Russia might not recover much.
Exacerbating beef's struggles was the fact that American consumers lost billions of dollars in equity in their homes and retirement funds, and many lost their jobs. They became savers not spenders. So they ate out less and traded down in their meat purchases in the grocery store.
Overall beef demand (retail, foodservice and exports) thus declined 10% in 2009 vs. 2008, returning it to 1998 levels, according to some analysts. The numbers will look better in 2010, but the degree and speed of improvement is at issue.
The key factor will be jobs. The unemployment rate exceeded 10% in October, with 7.3 million people having lost their jobs since December 2007. Add in the underemployed and the rate rocketed to 17% of the workforce. Only when unemployment levels decline will Americans start to feel more confident about the economy and start spending more money, say analysts. This suggests only a gradual increase in spending on beef.
As noted, cattle numbers shrank due to the recession. The U.S. herd from Jan. 1, 2008, to Jan. 1, 2010, might have declined by as much as three million head. But beef production the first half of 2010 is expected to be up slightly in 2009's first half. Most analysts have forecasts higher than those projected by USDA.
The increase will reflect year-on-year increased feedlot placements from last July through October and increased carcass weights, which set new records last October. Production though will decline about 1% in the second half of the year. Some analysts say beef production for the year will be down only 0.2% while USDA projects a 1.4% decline.
Cow-calf producers lost about $20/cow in 2009, the same as in 2008, says the Livestock Marketing Information Center (LMIC). Calf prices were the lowest since 2003. This helped alleviate but did not prevent heavy cattle-feeding losses because of high corn prices and a lower than expected live-cattle market. LMIC projected that feeding losses exceeded $2.4 billion or $90/head, the second-largest losses after 2008.
Tougher year for packers
Beef packers in 2009 replaced a longtime battle for market share with a new mantra: managing and optimizing margins. The result was Tyson Foods, the largest processor in terms of sales, made $214 million in operating income in beef for the year to Oct. 3. JBS USA Beef (including Australia) for the first nine months of 2009 had EBITDA (earnings before interest, taxation, depreciation and amortization) of $273 million.
Next Page: Feedlots under the gun
National Beef Packing, however, outperformed them both relative to its size. As the fourth-largest beef processor, its sales are nearly half that of Tyson Beef. But it had a record $143 million in net income in its year ended Aug. 29. It has now reported net income of $481 million in seven years. Such results suggest its $300 million initial public offering (IPO), which it launched in December, would be well supported.
JBS USA also plans to launch a $2 billion IPO in January.
Packers might struggle to replicate these results this year. The pressure on feedlots will be more intense, though, because of over-capacity and still-high corn prices. USDA puts the one-time feeding capacity in 1,000-head-and-larger yards at 16.6 million head. These feedlots had 11.1 million cattle on feed on Nov. 1, a 67% occupancy rate. Any herd expansion might not show up until 2013 at the earliest.
Feedlots under the gun
Overcapacity alone is likely to force feedlots to close. But feedlots also face escalating environmental costs under expanded CAFO (concentrated animal feeding operations) regulations. Feedlots since November 2008 have been required to have a nutrient management plan for manure and wastewater disposal. Coming into and staying in compliance with the new regulations could put many smaller feedlots out of business because of their higher per-head cost of compliance, observers say.
Producers and packers are sometimes at odds but they share a common trait. They are great survivors. Each will be hoping that a broad economic recovery this year will lead to improved beef demand.
There are signs that more countries will abide by international science-based standards to reopen markets and remove import restrictions. The beef industry rolled out several promising new products in 2009 and will continue to do so. The overriding theme for 2010 is that, to be profitable, each segment of the beef industry will have to do more with less.