The pain of recent record losses in the U.S. cattle feeding industry will not diminish soon, but tightening supplies could lead to a modest rebound in late 2010, according to agricultural economist James Mintert.
Speaking at Kansas State University´s Risk and Profit Conference Aug. 21, Mintert said that consumers have responded to the U.S. economic downturn by saving more and spending less. Not a bad thing on the face of it, but what consumers are saving means that they´re spending less on some foods, such as beef.
Mintert, who recently became the assistant director of extension at Purdue University, said, "historically, beef demand has benefitted from growth in the U.S. economy and a low (consumer) savings rate." In 2009 and into 2010, however, 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 that cattle feeders lost an average of $120 and $100 per head during 2008 and the first 7 months of 2009, respectively.
Mintert, who was a livestock marketing economist for K-State Research and Extension for 23 years, noted that the U.S. cattle industry was "a picture of a healthy industry" from 1925 to 1975 as the industry grew over time in response to growing aggregate demand for beef. Since the mid-1970s, however, 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 percent.
"Domestic beef demand is still suffering from a long-term decline," he said. "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 percent since 2005, which has made even a break-even 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 per hundredweight (cwt) in 2006, to more than $140 per cwt this year when producers factor in all of their costs, he said.
While the costs of production were rising, prices paid for calves were dropping.
Cattle producers have responded to the situation by sending cows to slaughter - in increasing numbers every year for three years straight from 2005 to 2008. That trend, Mintert said, 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 pounds and in 2010 will be just 25 billion pounds - both down from 26.5 billion pounds in 2008.
"Tight supplies could set the stage for a cattle price rebound in late 2010 or into 2011," Mintert said.
By 2010, overall total meat supplies are expected to be "very tight," the economist said. Annual U.S. red meat and poultry consumption in 2010 is expected to drop to about 207 pounds per capita. That would be down from about 211 pounds per capita projected in 2009 and well below 222 pounds 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 said.
Other factors affecting the cattle market are supplies of competing meats and any impact the H1N1 virus has on pork demand, he said.
The media continue to refer to H1N1 as the swine flu. This has confused some consumers and led to a reduction in pork demand, even though the illness is not related to eating pork, he said. And oftentimes, when pork prices slump, they weigh down beef prices, as well.
Mintert said that as the beef industry works to regain some of the demand it has lost in the past couple of years, he hoped that it would focus on some of the findings from a recent beef demand study. That study, conducted by Mintert and agricultural economists Ted Schroeder of K-State and Glynn Tonsor of Michigan State University, showed that convenience, nutrition, and safety are very important factors influencing U.S. consumers 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 said. "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 information from presentations given at the K-State Risk and Profit Conference is available at www.agmanager.info.