HUNTIN' DAYLIGHT -- HOPE AND DEMAND

by: Wes Ishmael

“The demand for beef has no known bounds. If you don't do it, Apple will,” said Lowell Catlett, an internationally renowned futurist from New Mexico State University.

He made that comment during this year's Cattlemen's College sponsored by Zoetis at the annual winter meeting of the National cattlemen's Beef Association (NCBA) in February.

Catlett offered that perspective after sharing the fact that with the advent of cameras placed in mobile phones and other mobile devices Americans take 10 times more pictures than they ever did before. Yet, photography pioneer and giant, Eastman Kodak filed for bankruptcy last year. Demand for the core product has grown exponentially, but the traditional provider of hardware, supplies and service to that industry couldn't figure out where it fit.

Thus, Catlett's belief that global demand for beef will continue to grow. The question is who and how they will supply what consumers want.

That seems an especially relevant question as the U.S. cattle business and beef industries struggle currently with disrupted domestic beef consumption patterns and shifting demand among beef products.

The third week of February, boxed beef cutout value continued to trade about $20/cwt. shy of packer and feedlot profitability by many estimates.

Total box beef volume (6,192 loads) for the week ending Feb 16 was the lowest non-holiday trade volume since July of 2009, according to Ed Czerwien with USDA Market News in Amarillo.

“This is especially tough since we dropped the cutout over $10/cwt. since December,” Czerwien says. “The most recent 10-week rolling average of boxed beef sales was 6,655 loads per week which compares to almost 7,300 loads per week last year at this same time. That difference of over 600 loads per week has been going on since last summer.”

For perspective, Czerwien explains, that weekly disparity of 600+ loads each week is equivalent to about 36,000 head of cattle weekly, figuring it takes 60-70 head to produce a single load of boxed beef.

“While beef demand is increasing, it is very likely not increasing fast enough relative to price pressure from falling beef supplies in 2013 and 2014,” explains Derrell Peel, extension livestock marketing specialist at Oklahoma State University in his weekly market comments.

Moreover, John Michael Riley, agricultural economist at Mississippi State University explains in a February In the Cattle Markets that recent events have displaced consumer consumption patterns, spawning a short-term over-supply.

“The predominant factor (for the recent decline in beef prices) is the loss of the income tax break for social security (6.2 percent of pay is now being deducted compared to 4.2 percent last year),” Riley says. “Using the median household income in 2011 of $50,054 as a gauge for current levels, this results in a $1,001 decrease from the family budget or about $83 per month. While this may not sound like a substantial decrease when carried across all households it does add up. A second factor is that the costs of other items in the family budget are increasing. Gasoline prices, for example, increased seven percent in the first month of 2013. Most families cannot make sweeping changes to their driving habits, while they can more easily alter their purchases at the meat case. Finally, the flu epidemic in the U.S. and the brutal winter storm in the Northeast impeded beef consumption...

“…Similar to the short-term impact of hurricane Sandy in October and November of last year, displaced consumption has caused a short-term build up of current supplies…this lowers prices in the short term since suppliers cut prices in an attempt to move their inventory. The decrease in take-home pay is a longer-term issue and is directly attributable to decreased beef demand. The price of beef coming into 2013 left some consumers priced out of the market. Since the amount of beef produced must equal the amount consumed, given that beef is perishable, this has forced the price of beef lower via a decrease in beef demand.”     

Moreover, atypically steep increases in average carcass weights have kept beef production higher than many anticipated, relative to the smallest January 1 national beef cow herd in six decades.

“Perhaps more significantly, the World Agriculture Supply and Demand Estimates (February) report shows changing expectations regarding competing meat supplies,” explained John D. Anderson, deputy chief economist at the American Farm Bureau Federation, in another February issue of In the Cattle Markets. “WASDE pork production estimates were raised two to four percent for the second quarter through the fourth. Broiler production estimates were increased three percent and four percent in the second and third quarters, respectively. These evolving market expectations highlight a real challenge for the beef industry.”

“Consumers are likely to continue adjusting the frequency and quantity of consumption of expensive middle meats,” Peel says. “This process is being aided by increasing indications that some restaurants are reducing portion sizes in an attempt to reduce product cost and thus maintain margins with fewer menu price increases. There is concern that beef demand, especially steak demand, is becoming more of a ‘special occasion' meal rather than a regular part of beef consumption. Though this seems part of the consumer response since the recession it is not clear whether consumer preferences have changed permanently. One thing is very clear: with steaks carrying a premium price the next two years or more, it is imperative that the beef industry do everything possible to ensure premium quality as well. Beef has always been significantly more expensive than pork and poultry because it enjoys strong preferences for the flavor and tenderness…Beef does not have to be the cheapest meat but it does need to provide the best value relative to price in order to preserve beef demand at record price levels.”

Choosing Next

Reaction to all of this, in tandem with sky-high input costs, loss of industry infrastructure (packing and feeding capacity, etc.), wonderments about whether the drought will break across wide sections of the country, etc.—has been varied, but reminds me of something John Maddux of Maddux Ranches headquartered at Wauneta, NE told producers about drought mitigation at the aforementioned Cattlemen's College.

Reaction to drought is a study in human nature, Maddux says. Optimism and hope often lead folks to wait too long to make difficult decisions. Along with knowing your carrying capacity, his key points of drought mitigation include: 1-have a plan; 2-Hope is not a plan; 3-Be proactive—get ahead.

In many ways, this perspective seems appropriate for choosing a path through the transitions occurring in the beef business: 1-have a plan; 2-Hope is not a plan; 3-Be proactive—get ahead.

There are plenty of tough questions everyone must ask. For my money, these two top the list: Is the industry viable? Is my stake and role within the industry sustainable?

On the one hand, Catlett emphasized, “I don't know what's coming, but I read history. Demand for what you're doing is increasing, but it will be different.”

On the other hand, Randy Black, CattleFax CEO noted at that organization's 2013 Outlook Seminar—also a part of Cattlemen's College, “Our industry will be smaller. It will contract. We need to come to grips with that reality.”







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