There are more tough times ahead for the beef industry but – thanks to tightening supplies – the beginnings of a recovery are possible late next year, says ag economist Jim Mintert of Purdue University.
Speaking at Kansas State University’s (KSU) Risk and Profit Conference, Mintert says consumers have responded to the U.S. economic downturn by saving more and spending less. The problem is they’re spending less on beef.
Mintert, former KSU ag economist who recently became Purdue Extension’s assistant director, says beef demand historically has benefitted from growth in the U.S. economy and a low (consumer) savings rate. But, in 2009 and into 2010, he expects weak consumer expenditures to hold back beef demand.
That demand slowdown is partly responsible for the record losses realized by cattle feeders during 2008 and 2009. For example, Iowa State University´s estimated livestock returns indicate cattle feeders lost an average of $120 and $100/head during 2008 and the first seven months of 2009, respectively.
Mintert says the U.S. cattle industry was "a picture of a healthy industry" from 1925 to 1975 as the industry grew in response to growing aggregate demand for beef. But since that time, the industry has responded to a lack of profitability among cow-calf operators by shrinking its numbers – from more than 130 million head in 1975 to about 94 million today – a reduction of about 28%.
"Domestic beef demand is still suffering from a long-term decline," he says. "In 1998, domestic beef demand was about half what it was in 1980. Unfortunately, the uptick in demand from the late ’90s through 2004 is starting to look like it was just a blip in the long-term decline in demand."
In addition to demand issues, the cost to produce beef calves, including feed costs and returns to owned assets, has jumped 30% since 2005, which has made even a breakeven situation beyond the reach of most producers in the last couple of years.
Breakeven prices for calves in Kansas have jumped from just over $100/cwt. in 2006, to more than $140/cwt. this year when producers factor in all of their costs, he says.
While the costs of production were rising, prices paid for calves were dropping. And cattle producers responded by sending cows to slaughter – in increasing for three years straight from 2005 to 2008. That trend, Mintert says, will likely abate somewhat this year and next, but the cattle herd will continue to shrink in part because dairy-cow slaughter during 2009 (through July) was up 15% compared to a year earlier.
As a result, the Livestock Marketing Information Center expects commercial beef production in 2009 will total about 25.4 billion lbs., and in 2010 will be just 25 billion lbs. – both down from 26.5 billion lbs. in 2008.
"Tight supplies could set the stage for a cattle price rebound in late 2010 or into 2011," Mintert says.
By 2010, overall total meat supplies are expected to be "very tight," the economist says. Annual U.S. red meat and poultry consumption in 2010 is expected to drop to about 207 lbs./capita. That would be down from about 211 lbs./capita projected in 2009 and well below 222 lbs. in 2007.
Live-cattle futures based on the CME market indicate some price recovery this fall – but that will only happen if demand recovers enough to reinforce the effect of tight supplies, Mintert says.
Other factors affecting the cattle market are supplies of competing meats and any impact the H1N1 virus – which the media continue to refer to as swine flu – has on pork demand, he says. Consumer confusion has led to reduced pork demand with the resulting slump in pork prices potentially weighing down beef prices.
Mintert says that as the beef industry works to regain demand lost in the past couple of years, he hopes it will focus on findings of a recent beef demand study conducted by he and ag economists Ted Schroeder (KSU) and Glynn Tonsor (Michigan State University). It showed that convenience, nutrition and safety are very important factors influencing U.S. consumer demand for beef. In particular, it appears that the beef industry has lagged the chicken industry in providing consumers convenient new products that consumers find attractive.
"A lot of what´s happened with the recent slowdown (in beef demand) is due to macroeconomics," Mintert says. "The macroeconomic problems in the U.S. are out of the beef industry´s control, but there are things the industry can work on to reinforce demand and prepare for a rebound as the economy recovers."
More info from presentations given at the K-State Risk and Profit Conference is available at www.agmanager.info.
-- Mary Lou Peter, KSU Extension