Beef industry faces a supply crisis

The beef industry is facing a supply crisis as liquidation of our nation's cow herd has now reached a critical stage. American ranchers have been forced to cull their herds to the point that it will have implications for years to come and may speed consolidation throughout every industry sector.

The U.S. Department of Agriculture's mid-year cattle inventory report put the total U.S. herd at a record-low 99.96 million cattle and calves, down 1.4 percent from 2010 and the lowest mid-year inventory since 1973 when the government first started compiling a July 1 figure. The report also pegged the number of all cows and heifers that have calved at 40.6 million, down about 1 percent from last year. The report estimates the 2011 calf crop at 35.5 million head, down 1 percent from 2010.

The mid-year report confirms what we knew about cattle numbers from the January 1 report but raises the red-flag even further. After the January numbers were released, analysts noted the cow herd was the lowest since 1958. The January report estimated that there are 5 percent fewer cattle in the United States than in 2000 and 11 percent fewer than just 15 years ago.

While we're reducing our cow herd, cattlemen have been increasing the number of cattle on feed and we're producing more pounds of beef. In other words, we're in a transition phase we're sending cattle into the supply chain at the same time we're closing the factory. That's not a sustainable situation.

Cattle numbers have been declining for about five years, and the causes of our industry's liquidation crisis are not a mystery. Oil prices skyrocketed in 2008, driving corn and other feed grain prices dramatically higher. The world-wide recession that began that same year also played a large role in limiting beef demand and forcing cattlemen to shift into survival mode.

Slowly, it appeared we were on our way to recovery. Then the drought hit. And not just your garden variety drought but a massive, wide-spread record-breaking drought. Ranchers throughout the Southwest have been in a forced-liquidation phase for much of 2011, and there is no end in sight.

The cattle inventory is critical because our industry already operates under the pressure of excess capacity. Nationally, feedyards are at about 68 percent of capacity. In other words, at least 30 percent of the pen space remains idle. Packing companies also have excess capacity, and they have closed plants and shortened processing hours in recent years as a result of that over-capacity.

Smaller inventories will support prices for all cattle and calves in the short-term. Industry analysts believe beef demand remains strong, even as our nation's economy struggles to recover. Yet, the dwindling inventory can have significant long-term repercussions.

The declining supply of feeder cattle causes ripple effects down the chain that go beyond just filling feedlot pens and packer shackle space. Short supplies create an impact on retailers, too, and may ultimately affect consumer buying habits.

Last year, America's per-capita beef consumption was 59.7 pounds. That's the lowest since we began keeping track in the 1950s. Per-capita consumption is not a measure of beef demand but rather a measure of supply, since we consume everything that is produced. The measure of demand is the price we pay for those 59.7 pounds of beef.

But tighter supplies and higher prices can't continue indefinitely. At some point, analysts agree, we may price beef out of the domestic market.

Beef production during June was 2 percent above 2010, and commercial red meat production through the first six months of 2011 was 1 percent higher than last year. Analysts believe beef production will continue at or above last year in the near-term as we keep pushing cattle into feedyards as a result of the drought.

But at some point beef production will decline maybe dramatically. And that decline will further lower per-capita consumption and drive consumers toward alternative protein sources like pork and poultry.

As that scenario plays out it will become evident that this year's unprecedented drought will affect our industry for years to come.