KAY'S korner

Oct 1, 2010

Domestic demand remains weak

The Great Recession might be over, but thats little comfort for the millions of Americans still out of work or working reduced hours. In fact, our nation of conspicuous spenders has become one of extremely cautious spenders, and this new attitude continues to show up in food spending.

Americans in recent years have spent about half their food budgets away from home, the other half in the grocery store. The recession forced people to stretch their food dollars by buying more food to prepare and eat at home. This helped supermarket chains maintain their sales and profit margins even as they lowered prices. Restaurants, of course, suffered.

Now the pendulum is swinging back, with many in the restaurant business reporting improved traffic from this time last year. But just as in the grocery store, consumers are cherrypicking what they spend their money on. They are bargain hunting as never before with their food dollars.

All this continues to impact domestic beef demand, which is still down slightly from this time last year. Retail beef prices are currently 3-5 percent higher than last year but retailers are expected to increase their prices because their profit margins on beef narrowed sharply last month.

Thats because they had to pay 11 percent more for beef in August than a year ago. Higher retail prices might help retailers, but the industry is concerned that higher prices might force consumers to buy more pork and chicken.

Fortunately, global demand for U.S. beef is extremely robust. Although exports account for only 9 percent of U.S. production, they are currently more important to the industry than for many years because of weak domestic demand.

In fact, global demand for beef from all countries is improving after being hurt by the recession. But global cattle numbers continue to decline and are unlikely to stabilize any time soon. This scenario is bullish for cattle producers and beef prices. But it also raises the prospect of consumers all over the world eating more chicken and pork because beef will not be available or will be priced out of their reach.

Industry leaders in the largest beef producing countries are seeking ways to encourage producers to expand their herds. But even if this begins soon, larger numbers might not be seen for several years. U.S. producers appear little inclined to expand despite much higher prices for young cattle this year. This means the U.S. cattle population is likely to fall to 92.3 million head by Jan. 1 next year. This would be the smallest herd count since 1958s 91.176 million head and would mean a 3.7 million head, or nearly 4 percent, decline in three years.

The global cattle herd has been shrinking for several years, notably in North America, but now in South America. Argentinas national herd has shrunk by nearly 9 million head in the past three years. The global herd fell 3.2 percent from 2008 (999.184 million head) to 2010 (967.589 million head), according to data from USDAs Foreign Agricultural Service. The decline from 2009 to 2010 was 2.1 percent, or 20 million head. Not surprisingly, Argentinas declining herd was a main topic of conversation at last weeks World Meat Congress.

Production gains have offset some of, but not all, the decline in global cattle numbers. Global beef production in 2008 was 58.105 million metric tons, according to USDA. It fell to 57.017 million metric tons in 2009 and is projected to fall again to 56.625 million metric tons in 2010. This would represent a 2.5 percent decline in two years.

Its little wonder than that beef industry leader Wesley Batista says now is the time to invest in cattle and farms. He is CEO of JBS USA, the part of JBS SA that runs its beef, pork and poultry businesses in the U.S. and Australia. JBS, the worlds largest beef company, sees demand growing globally, Batista told this years annual conference of the Australian Meat Industry Council. JBS in the last five years has seen something new, growth in emerging markets, he says.

South and North America will remain the largest beef producing regions, says Batista. But their supplies are flat, or declining in North America. Brazil will continue to be the worlds largest beef exporter. But its exports will not grow because any growth in production will be offset by a growth in Brazilian consumption and demand. This will help support global beef prices because Brazils prices will increase, he says.

Batista is optimistic that the global beef industry will see a world shortage of beef, plus growing producer margins and growing beef demand. The top markets for expanded beef sales are in Asia, the Middle East, Russia and the European Union.

But China will be the most important market going forward. JBS is bullish on China, as it is the biggest player in Asia, he says. His message to producers globally is: retain cows for greater beef supplies in five years time. But will U.S. producers heed the message? 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. Kays Korner appears exclusively in WLJ.)