Market Perspective

January 10, 2009 11:13 AM
 

 

Bob Price

The new year has begun and it is a good time to look at which factors will impact your business this year. But as cattlemen, it is just as important to take a peek at which longer-term factors may be affecting your operation in the next several years.

The rosy part of the cattle market picture in 2009 comes from the continued decline in cattle numbers in North America. While the numbers appear to be trying to level out, there is nothing to indicate that North American cattle herds are going to be in an expansion mode for quite some time.

In fact, the supply side of the entire meat protein complex looks quite manageable for 2009. Pork supplies should increase little, if any, and broiler production could actually contract slightly. If cattle prices were determined solely from meat supplies, it would be easy to get bullish this year.

However, the reality is that cattle prices are a function of both supply and demand. Unfortunately, the demand picture looks much cloudier.

Economy tug-of-war. According to the National Bureau of Economic Research, the U.S. economy has officially been in a recession for more than a year. The longer consumers remain concerned about their economic well-being, the less they will spend. This may lead to shifts in the protein sources consumers are willing to buy. Beef is a high-priced protein source. While beef demand has improved in past years, a prolonged economic slump could be detrimental to beef prices.

The problem is not limited to the U.S. In fact, the economic climate in many countries that import U.S. beef is even worse than it is here. And the rise in the value of the U.S. dollar makes beef more expensive in terms of currency for the importing country.

This problem is also evident in the value of cattle hides and offal, most of which is exported. In the last half of 2008, the value of every animal slaughtered in the U.S. declined more than $50 per head as a result of the sharp break in hide and offal prices.

All in all, it looks like the shaky demand posture could outweigh the rosy supply picture when projecting cattle prices for 2009. Average cattle prices will likely not be much better than in 2008 and could actually be a little lower.

But selling price is only one piece of the profit puzzle. Which factors will affect costs this year and beyond?

Grain prices in 2009 will average significantly below 2008 unless a weather event dramatically reduces production. Hay prices should also be lower in the absence of weather problems.

Increased costs from legislative and regulatory actions are almost assured. It is too early to tell if country-of-origin labeling will increase the price consumers will pay for U.S. beef, but industry compliance costs will be higher.

Environmentalists will have the most receptive ear they have ever had in Washington. Confined livestock feeding facilities—feedyards, and even drylots and winter haying pens—may come under more scrutiny and regulation. There is already talk of regulating (and taxing) livestock emissions under the Clean Air Act.

In sum, 2009 looks like a good year to tighten the belt, sharpen management skills, and not focus on a home run. You probably don't want to pass up forward-selling opportunities that pencil out some profit. Longer-term, smaller North American herds will help support prices for cattlemen in the future.

Bob Price is president of North America Risk Management Services, Inc. (NARMS), of Chicago and has 27 years of experience in developing and executing risk management programs. He can be reached at bprice@narmsinc.com.

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