Challenges Remain as Opportunities Arise

January 7, 2010 06:00 PM

Oh, the changes a year can bring. Cattle producers saw firsthand how the challenges of 2009 altered the industry's landscape. From those changes, though, opportunities are emerging, giving producers hope for a more profitable year.

Demand in the U.S. and abroad. In 2009, given the state of the economy, beef demand was down 10% from a year ago, says Randy Blach, executive vice president of CattleFax.

"The drop in demand has been the biggest impact on your operations in the past 18 months,” Blach says. "If we had the same demand right now that we did a year ago, we would be selling fed cattle at $94, rather than averaging $83.50.”

In addition to faltering beef demand, 2009 exports were also waning. Accumulated beef exports for Jan. 1, 2009, through Dec. 3, 2009, stood at 872.4 million pounds, a decline of 7.5%, according to U.S. Meat Export Federation (USMEF) data.

"Given current market access restrictions and the lingering economic situation, U.S. beef exports in 2009 are expected to decline by 10% from the prior year, totaling 886,000 metric tons valued at more than $3 billion,” says USMEF economist Erin Daley. "But beef exports should rebound to roughly their 2008 level by next year and are expected to surpass their pre-BSE volume by 2013.”

That forecast is based in part on an expected rebound in Korean demand, increased market access to Japan and China before the end of 2010 and more access to Taiwan, which recently began accepting bone-in beef.

"Further enhancing U.S. beef exports in the coming years will be the new beef agreement with the European Union, where a duty-free 20,000-metric-ton quota was created in the context of the hormone case,” Daley says.

Going forward, U.S. beef exports will benefit from growing consumption in developing markets, such as China, Russia and Mexico, Daley adds.

Exports will equal about 10% of estimated 2009 U.S. beef and variety meat production. "When converted to a per-head basis, the value of exports in 2009 will be about $116 per head for steer and heifer slaughtered,” Daley says. "This compares to around $136 per head in 2003, when total exports reached $3.85 billion.”

Volatile commodity prices. An upturn in prices "depends on economic recovery and related increases in beef demand,” says Ross Wilson, president and CEO of the Texas Cattle Feeders Association. "After more than 24 months of losses, cattle feeders must buy replacement feeders with a reasonable break-even and they must restore equity. At the very same time, calf and feeder prices must reach levels that will encourage expansion of the cowherd.”

A big challenge for feeders remains volatility in the corn market. A late harvest, low test weights and high moisture rates could force a large amount of corn out of storage and onto the open market this winter and early spring.

Feeders are also carefully watching for the long-anticipated announcement from the Environmental Protection Agency (EPA) on whether or not it will increase the ethanol blend rate from the current 10% to 15%. "An increase in the blend rate to 15% will significantly increase the demand for corn to produce ethanol and cause a great deal of volatility in the market. This year is when producers would be well advised to closely manage feed supplies,” Wilson says.

A matter of policy. In addition to the demand and price concerns, there are a number of challenges facing beef producers in Washington, D.C. From health care reform to immigration to EPA rulings, all have the ability to significantly impact the cattle business.
Other governmental rulings could impact the way producers market cattle and set up marketing agreements with others. Starting soon, USDA and the Department of Justice will conduct workshops across the country to look at competitive conditions in every sector of agriculture.

Chandler Keys, vice president of government affairs and industry relations for JBS USA, says this actually presents an opportunity for agribusinesses. JBS is currently the largest beef processor in the world.

"At the end of the day, we have approximately 250,000 farms that are run primarily by families that produce 85% of the food, and they sell that to agribusinesses that take the raw product and process it into food,” Keys says. "Those business relationships are a mystery to a lot of Americans. This presents an opportunity to go talk about those business relationships between the modern-day agriculture producers and agribusiness and how it all works to produce food for average middle-class Americans.”

On the environmental front, cattle producers should be aware of an EPA ruling saying greenhouse gas (GHG) is an endangerment to public health and the environment. According to the National Cattlemen's Beef Association (NCBA), this sets the stage for GHG regulation under the Clean Air Act and could give EPA unprece-dented control over every sector of the economy, including agriculture and livestock production. While the endangerment finding does not directly regulate GHGs, it sets in motion EPA regulation of GHGs from stationary sources and new source performance standards, warns NCBA.

Then there are the forces of those who are not involved in agriculture. In 2009, the animal rights movement influenced the passing of Proposition 2 in California, banning poultry cages. Livestock producers in the state of Ohio knew the same influencers would soon push for ballot initiatives in their state, as well. These producers took matters into their own hands and passed a ballot initiative creating a board on livestock welfare standards, in order to stem the movement. Animal rights proponents will certainly continue to push their agenda and have the deep pockets to get some of it done, continuing to challenge livestock producers in 2010.

Growth in brands. Among the challenges, new opportunities in the beef business are emerging. Al Kober, Certified Angus Beef (CAB) director of retail, says this has been the best year ever for CAB despite the economic downturn. Product sales from Oct. 1, 2008, to Sept. 30, 2009, topped 663 million pounds. That surpasses the fiscal 2008 record of 634 million pounds sold by 4.6%.

"Consumers today, more than ever, are looking for that great beef-eating experience at home. Eating at home together as a family will grow and become the new norm,” Kober says.

While CAB brings a premium price in the meat case, the trend is showing that consumers are willing to spend additional money for an advertised better eating experience.

Kober says the number of cattle that meet CAB quality specifications has increased, as well. "Because of production adjustments made during this downturn, CAB quality is at an all-time high,” he says. Producers have culled marginal cows from the herd. As corn prices rose, more cattle feeders turned to distillers' grains for feedstock, which has improved quality grades in cattle.

Some wonder, though, if that increased supply will diminish grid premiums. Kober says that CAB cutout spreads are consistently wide enough to deliver premiums back to all segments of the industry.

The challenge the brand faces now is that many other retailers have seen the success of CAB during this downturn and have begun to develop their own high-quality private labels.

"This is especially challenging for packers, who now have to sell some of the extra CAB-type cattle to retailers under the CAB label or create their own new in-house brand,” Kober says.

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