Dec 31, 2009

Help from hogs

Beef markets have been frightfully stagnant this past year and that has weighed heavily on live cattle prices. The last big rally we had in beef sales was about 16 months ago when the export market exploded with the opening of the South Korean market and the Russians were very short on meat. Cutout values ran up to the $1.70 level and cleared a lot of supply out in August 2007 which is traditionally when live cattle supplies are at their largest.

Beef supplies have been shrinking and we are still experiencing liquidation of the nation’s beef cow herd. The next cattle inventory report is expected to show a one-half to 1 percent decline in total cattle numbers. It appears that we will finish up the year with a 2.7 percent decline in beef production over a year ago. Live cattle slaughter will be down 3.5 percent from last year, which also shows us that cattle weights remain large. With declines in production like this, one would have to think that the low cattle supplies should help the market advance.

But it is not a supply issue this time, it’s a demand issue. Even though production is down 2.7 percent, beef demand has fallen nearly 6 percent this year. According to the industry’s demand index, beef demand for the third quarter alone was down 8.4 percent. Consumers have not shied away from the meat case; they have had many inexpensive alternatives such as pork and poultry. They have also turned to lower-priced beef cuts. The higher priced ribs and loins are still the slow movers, but they have very attractive wholesale prices.

For most of 2009, hog prices have been in the dumper, even worse than cattle. Pork producers appeared to be having a hard time reducing production last year, but finally reduced supplies sufficiently to support a higher market. Hog prices this fall were hovering in the $50 area. Now, looking forward, the lean hog contract is priced in the $70 range for this winter and spring, and the June contract is at $78. I’m a believer that a high tide raises all boats and with this kind of price recovery on hogs, it should help pull beef prices higher.

I suppose that if you look at what retail beef prices are and the potential of where pork prices could be later this spring, it could place beef in a more favorable price point when compared to pork.

I asked Jim Robb at the Livestock Marketing Information Center where the pork cutout could be if we do indeed see hog prices in the $78 range this June. He said we could conceivably see the pork cutout advance to $100 from its current $68.60. That would be a rapid increase in pork values and give beef demand just the stimulus we need to see. We know that consumers would prefer to eat beef over pork, even with beef at a slightly higher price. Consumers should see the value difference and, in relation to their preference, choose to eat more beef.

This is the same old story for the beef industry. We need to work on gaining more market share for the beef industry. Consumers have not abandoned the meat case, but have either traded down in beef purchases or bought pork and poultry instead in recent years. The real drag on the beef cutout is still the middle meats, the higher value loins and ribs, which are attractively priced in the wholesale markets. But that’s not where consumers buy beef or pork.

However, what the futures markets show us down the road can change in a heartbeat. For example, there were too many hogs for the market to absorb backlash from the H1N1 episode which played a role in the decline in the pork market. Most of this damage came from the export market which, in turn, has been hurting the beef market. Recovery for the export markets has been slow for all, but it appears that is improving.

We are still faced with the challenge of improving beef demand and value is at the heart of every purchasing decision. Beef promotion and an effort to squeeze as much value-added product out of every carcass through research and development is more important than ever.

If beef is perceived as a better value than pork or poultry, we’ll get it sold. But, we need all the help we can get, even if it is from the pork industry. Happy New Year! — PETE CROW