CattleFax Outlook: Tough year ahead

With a slowing economy and consumers keeping a closer eye on their spending, some of the dynamics in the beef industry are shifting in 2009. Cattlemen attending the annual CattleFax Outlook Seminar here heard that cattlemen face softer beef demand to start 2009, but that could change if the financial markets begin to stabilize.

As in previous years where market volatility was prevalent, risk management will be an important strategy this year.   

"Know basis,” says Randy Blach, executive vice president for CattleFax.  "It needs to become second nature.  We've got to learn to understand risk.”

Consumer are making more meals at home and eating out less at nicer restaurants.  That has lowered the value of the higher priced middle meats like the rib and loin.  At the same time, the chuck and round are claiming a larger share of carcass value (21% vs. 19%) compared to a year ago.

Overall cattle supplies are expected to decline in 2009, following a 1.5% dip in 2008.  Beef cow numbers have declined 600,000 head to 31.9 million in response to drought in some areas and marginal profitability elsewhere.  Beef cow slaughter is projected to be at a liquidation pace in 2009.  As a result, the calf crop for 2009 and 2010 is projected to shrink by 2%.

A decline in cattle inventory means a smaller beef supply and that could bump beef imports to 2.7 billion pounds for 2009, also encouraged by a stronger dollar that makes the U.S. market more attractive than it was a year ago.  Supplies of competing meats also are projected to be lower in 2009, marking the first time in decades that all the major protein supplies have declined.  This is happening partly as a result of higher feeding costs in the livestock industry.

Even with softening domestic demand for beef, worldwide demand for protein is increasing, says Brett Stuart, a CattleFax analyst specializing in exports.  While the credit crunch will limit exports to some top markets, U.S. beef exports should post some growth, led by gains in the South Korean market as Mexico continues to be the No. 1 export destination for U.S. beef.  For the year, CattleFax projects that beef exports will reach 2.3 billion pounds.  That figure taken with net imports represents an improvement in the beef trade gap as U.S. exports continue to rebuild from the 2003 BSE incident.

Increased production costs for corn, estimated to be as much as 30 to 40% more than 2008, will impact planting decisions.  The current crop is forecast at 12.5 billion bushels, and increased production is needed to meet ethanol demands, although that market is softening.  U.S. and world stock levels remain historically low, which tends to support prices.

"You better have a disciplined approach to how you manage risk or you will not like the results,” Blach says. 

Over the last two years the average price of a bushel of corn has increased $2.70.  CattleFax projects that the overall U.S. price for a bushel of corn in 2009 will be lower than 2008, $4.25 vs. $5.30.

"Economic conditions and credit availability, especially in foreign markets, are going to affect us a lot this year,” Blach says.  "We'll get through this and those who do a better job of managing their risk will get through a little better than the rest of us.”