KAY’S korner

Nov 6, 2009

KAY’S korner

Demand will be key in 2009

 Most folk in the cattle/ beef industry will be happy to see the end of one of the most challenging years in history.

You have to go back to 1973, when President Nixon imposed price controls on beef, to find one as challenging. The market was in uproar the rest of the year. But it hardly compares to the vicissitudes of 2008’s volatile and, at times, vicious market. For starters, cattle feeders lost more money in 2008 (at least $120 per head, or $3.1 billion for the sector) than in any year since modern cattle feeding began in the early 1960s.

The latest Cattle on Feed report showed that cattle feeders placed fewer cattle in feedlots than a year earlier for the ninth month in a row apart from in July. The huge losses had a lot to do with this, as did tighter borrowing requirements. Cattle feeders are also convinced the price of young cattle outside feedlots will decline in the coming months. If that occurs, that should help feeders eke out modest profits in the second half of 2009. But it’s bad news for producers who still own their 2008 calves and other middlemen holding heavier cattle out on winter grazing. Many cow/calf operators had their first cash-based loss in 2008 for eight to 10 years. Just when they expected to be in the driver’s seat in terms of prices for young cattle because of shrinking cattle numbers, they face the same pressures that cattle feeders and packers are under.

I’ve written before about the industry having to downsize because of declining cattle numbers in the U.S. and Canada. That’s still the case. But the greater concern is soft beef demand in light of consumer cutbacks in spending. For years, Americans spent with little regard to the consequences. That’s why consumer spending represents 70 percent of GDP. Trouble is, some of that spending went on credit cards and came out of homeowners’ equity. Americans now have a lot of debt and no way to raise more money. So they are spending less on everything, including food. This is affecting beef demand in several ways. Consumers are transferring their food dollars from eating out to eating at home, and they are trading down in their meat purchases.

The mid- and upper-tier restaurant business is hurting, but fast food chains and grocery chains are thriving. Restaurants are seeing both their top and bottom lines suffer. But McDonald’s saw November sales in its U.S. stores up 4.5 percent from the previous year, while global sales were up 7.7 percent. This followed October sales up 5.2 percent and 8.2 percent respectively. Largest grocery chain Wal-Mart is seeing more store traffic than ever. Not surprisingly, these two companies are the only two of the 30 companies that make up the Dow Jones Industrial Index that have a higher stock price than a year ago. Largest conventional grocery chain Kroger reported its sales in its latest quarter were up 9 percent from a year earlier.

Consumers are eating fewer steaks and more hamburgers and ground beef. So middle meat (rib and loin) wholesale prices are lower than normal. Cheaper cuts such as chucks, rounds and fatty trim are higher priced than a year ago. But these items can’t sustain the overall value of a carcass. So that value has declined, which in turn has meant lower prices for fed cattle.

Lack of consumer spending has grocery chains in a bind. They are unwilling to lower their everyday beef prices because they’re trying to maximize their profits on reduced beef sales. They’re also buying beef virtually for immediate sale because they don’t know how consumers will spend their dollars at the meat case after the holidays.

The result is that packers are in the midst of some of the biggest holiday-week production cuts in years. Most plants normally run only slightly reduced hours during the period, but packers announced big reductions.

By my calculations, they will kill 175,000 fewer cattle than the year before in a four-week period, including the week just ended.

Such cutbacks have raised concerns that cattle in feedlots ready to be marketed might start backing up if weekly slaughter levels don’t pick up sharply in January.

Analysts say the industry will have to process an average 660,000 head per week during the month. But the market would be swamped with beef if that occurs. Global demand for beef has also declined in the face of weaker economies and declining consumer spending in many countries. Beef exports increased 30 percent in 2008 versus 2007. But weekly exports by December had fallen 46 percent from their late August peak, and 2009 exports are expected to increase only 3 percent from 2008. Pork and chicken exports in 2009 are expected to decline 14 percent and 8 percent respectively. Both sectors are in the process of reducing their numbers. But pork production in 2009 is expected to be down only 1.5 percent, chicken down 2.7 percent. So consumers will have plenty of protein alternatives to beef. The King of Meats remains Number One with consumers in some ways. But beef is becoming more of a meat treat and less of an everyday part of the diet. —
Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)