It's absolutely striking to see how poorly the economy performs in an election year, especially if there is not an incumbent running. Some economists argue that this is nothing more than the business cycle and that the cycle has more effect on elections than elections have on the cycle. I don't attempt to argue that point, but I believe that the economy, like everything else in life, is largely determined by our attitudes.
And in an election year where everyone is trying to position themselves as the candidate of change, the overriding theme has to be that change is a good thing. This, in turn, creates the presupposition that things are not going very well. There are definitely areas of our economy that are troublesome, but the deciding factor of whether the economy suffers a minor downturn or enters into a full recession tends to be consumer confidence.
Consumer confidence has a huge affect on discretionary spending and thus beef demand. Up to this point we have seen beef demand continue to be quite strong. But the question is, how long can it continue to remain so? Commentators are pointing out that the baby boom generation is nearing retirement and they are perilously close to becoming disillusioned. The tech bubble and collapse created and then eliminated a lot of their wealth; the housing bubble is threatening to follow a similar path.
Psychologists warn that the baby boomer generation is at a very critical stage -- they don't perceive that they have the ability to start over, and thus respond to setbacks with the double-edged sword of acceptance and disillusionment. If that's so, it could lead to a tightening of discretionary spending at just the time when the economy is least equipped to handle it.
I'm not one who believes in the doom and gloom scenarios that are coming from both ends of the political spectrum. But it's not difficult to make the case that baby boomers won't be in a position to retire and maintain their lifestyles. Regardless, this is the generation that continues to dominate economic trends. Obvious consumption will be viewed unfavorably, and as a result, it's likely we'll see a return to less materialistic type of values. That could be a good thing for the beef industry if consumers continue to see beef as a valuable part of their diet, or a bad thing if it is seen as a luxury item.
The bottom line is that nearly everyone agrees that the economy has taken a one-two punch with the housing crash and soaring prices, most notably energy. So, while the verdict is still pending on whether or not this will be a mild or severe economic downturn, either way it will be extremely difficult to grow beef demand at the pace we have been.
The kicker for the beef industry is that in an ethanol-subsidized world, we need phenomenal demand growth to maintain profitability for the cow/calf sector. Most indicators are quite favorable for the beef industry, but we have hurdles that we have to adjust to -- tremendous over-capacity in the feeding and packing industries, and an entirely new price structure for key inputs. Never bet against the U.S. or the beef industry, but transitional periods where new balances are established are rarely fun, either.
The world economy is poised for tremendous growth with nearly half of the world's economy transitioning into more free-market economies. That is absolutely exciting for long-term demand. Supplies of beef are tight, which I believe will continue in response to the new ethanol economy. Demand domestically has been strong, and the U.S. will continue to be the economic powerhouse for the foreseeable future.
I'm bullish on the cattle industry, and am well aware that some will think I'm being disloyal by speaking negatively about the future of the economy or the beef industry in the short term. I believe in hoping for the best, but I also believe that one should make their business plans based on realistic assessment of current trends. In the short term, the economy's performance will make it difficult for beef demand to continue to push prices higher. And input costs in an ethanol world will not only lead to a smaller industry, the consolidating process will be a bumpier path than the one we have been on.
That means radical changes will be required in the near term -- increasing expenditures on genetics, adjusting management systems to minimize the use of high concentrate feeds, and adapting to changing pricing structures. And it means that creating value will have to become a priority, making it just as important, if not more so, than reducing costs. It means that managers in all segments must embrace the fact that we are operating under a new set of rules.