Seemingly everyone is relishing today's higher prices – record prices in most cases. But, there remains a lot of uncertainty about the marketplace. Devastating drought; record hay, corn and fuel prices; plus the news this week that Italy is heading down Greece's economic path, all help to create a lot of economic uncertainty.
Record input prices require record market prices. And, in fact, prices had looked like they would keep up with input prices until the drought reared its ugly head. Price increases in hay, for example, would have been manageable when merely spurred by acreage shifts from forage production to grain production. But, when that loss of acreage from forage production to grain production was coupled with drought, things really got tough. Who will contemplate expansion when they're struggling to find hay, or can't justify the cost of hay when they can find it?
The situation is similar on the demand side. Exports have been the bright spot. Meanwhile, domestic demand has held together better than most folks assumed, given that the overall economy is struggling mightily. But, with the economic situation in Europe disintegrating, there is less hope for global growth. In fact, the demise of European socialism is probably more concerning than the fall of the Soviet Union's economic system a few years ago because Europe is more intrinsic to the world economy. Plus, it provides a gloomy prospect of what the U.S. might soon face, given that we seem determined to follow Europe's socialist missteps.
Then, there's corn. While still predicted to be historically huge, the 2011 corn crop is now projected to be the smallest in four years. Plus, worldwide stocks are plummeting (a 16-year low). The good news is that feed usage is expected to be at a 22-year low. Of course, the bad news is that the higher prices continue to shrink our industry to unprecedented levels.
Yes, we have some very interesting dynamics at work today – a virtual guarantee of record prices for 4-5 years, but more risk, more uncertainty and the underlying fact that most of the things driving current prices are the result of bad fundamentals. That is, that these high cattle prices are almost solely driven by fewer cattle numbers due to a lack of profitability.
Thus, to the dismay of the feeding, packing and retail industries, the factory shows no signs of significant expansion, despite these higher price levels. The bottom line is that the cattle industry, while in much better shape than the overall economy, is suffering from the same dilemma. That's a lack of confidence to begin earnest expansion, and that concern is largely justified.