Economist: Profits in Livestock Depend on Demand

"Tough times across the livestock sector can get better this year, but it will take demand, demand, demand,” said Scott Brown, economist with the Food and Agricultural Policy Research Institute (FAPRI).

"Supply is not the problem. We need a return of consumer confidence,” Brown told University of Missouri Extension livestock specialists at a meeting on campus. "When consumer confidence was chopped in half, we went into uncharted territory. There will be recovery when consumers are ready to spend, but it will require people getting jobs.”

There are bright spots in the economy. "Economic growth was up 5.7% in the fourth quarter of 2009. That was unexpected,” Brown said. "And we're getting good news from the stock market.”

Pork prices have begun to rebound in 2010 after extended low prices. That recovery results from strong pork exports, Brown said. But lower beef exports have hurt prices, and the complete return to some Asian markets is not expected soon.

A loss of exports of chicken to Russia also works against the beef trade. Canada and Mexico are top customers of U.S. beef; however, chicken that had gone to Russia now goes south of the border, where it competes with our beef.

The strength, or weakness, of the U.S. dollar affects agricultural trade. As the U.S. dollar drops in value, export sales become easier, increasing our net meat exports, Brown said. "If our dollar strengthens in the world market, it will hurt our exports, big time!”

Beef also lost demand for quality cuts at the high-end restaurants. However, sale of prime cuts through supermarkets has increased. "People buy steaks and take them home to cook,” Brown said. "We've got the supply to meet that demand.”

Predicting meat prices has become more complicated for economists, Brown said, because so many factors worldwide affect meat consumption. "It used to be if we could figure out the beef supply, we could tell you the retail price of steaks.”

A recovery in demand, based on economic recovery, brings other downsides into play. As consumers get more money, they use more energy.

Crude oil prices are now below $70 per barrel. If demand increases and crude oil prices head up to $90 a barrel, that will draw money out of consumers' pockets, affecting buying habits.

Short-term economics may affect the long-term health of the beef industry, Brown said. As feedlots face losses, more will go out of business. That in turn could possibly put more packers out of business. "We may be losing infrastructure that we need long term.”

Feed costs also affect meat production and those costs are affected by energy prices.

"Crude oil prices matter a lot,” Brown said. "Now corn prices are tied to the movement of fuel prices. We're not likely to see those long-term corn prices of $2 a bushel. It's possible, but not very probable.

"Those higher feed costs add 40% to the cost of raising livestock,” he said. "We used to talk of an annual growth in meat supply of 3-4% a year. Production is down as we go through a period of adjustment, facing the higher feed costs.”

Source: University of Missouri press release