KAY'S korner

Sep 30, 2011

Best of times but...

This should be the best of times for beef producers. National herd numbers have fallen each of the past four years, yet domestic and global beef demand has improved steadily since the end of the 2008 recession. The U.S. has reclaimed its position as the world’s leading beef exporter. This is a remarkable achievement, given that U.S. beef was shut out of most export markets after the U.S. found its first BSE case at the end of 2003.

It’s clear that more consumers around the world have the financial ability to buy grain-fed beef. The U.S.’ huge advantage over other countries is that it can supply massive quantities of uniformly high-quality fed beef.

This reflects the size of the industry—it will produce more than 21 billion pounds of fed beef this year—its access to high-quality feed ingredients and latest cattle feeding techniques, and genetics increasingly based on the Angus breed. Moreover, the U.S. can make this beef price-competitive and affordable to more people because of the industry’s economies of scale and because of the weakness of the U.S. dollar.

The weak dollar in the past year has made U.S. beef price competitive with Aus tralian and New Zealand beef in key Asian markets. It’s also competitive with lesser quality Brazilian beef, due in part to the rapid appreciation of the Brazilian reais against the greenback. But the U.S. dollar is starting to strengthen. Whether this trend continues will be closely watched by producers, processors and users around the world.

Even if U.S. beef loses some of its competitive advantage, the export boom should continue through 2012 because global demand is growing while supplies tighten. This is equally true for all types of beef. Barring a new global recession, beef demand will continue to grow while global cattle numbers shrink.

This should be a green light for producers to expand their herds. But in the U.S., catastrophic drought in Texas, Oklahoma and parts of surrounding states has meant herd contraction or outright liquidation rather than expansion. Even in regions with the best grass conditions in some years, such as in California, producers are wary about expanding.

Producers’ reticence is understandable. The cattle cycle has a long history of booms and busts. Producers are only seven years on from seeing BSE shut down all their export markets and cause a serious, albeit shortterm, decline in domestic cattle prices. They also worry about the impact of high corn prices on cattle feeding margins and on the price of young feeder cattle, despite declining cattle supplies. They also face higher costs for all their ranching inputs and volatile markets that continue to be buffeted by Europe’s sovereign debt crisis. Concerns are growing that the crisis will herald a new recession in the U.S. and globally, which would hurt beef demand at home and abroad.

Another inhibiting factor is that the average rancher is getting older every year and is becoming more riskaverse. A friend of mine ranches in Arizona. At one time, he ran 14,000 cows. Now he’s down to 6,000, mainly because he’s in his mid-70s and wants to retire. No family member wants to succeed him so he is culling his cow herd to the point where he can sell the ranch and no cows will be older than five years old. But if he was 10 years younger, he tells me, he would be expanding as much as possible.

Overlaying the market factors is the increasingly heavy hand of the federal government. The U.S. meat and poultry industry has battled for 15 months to have a proposed USDA regulation (the GIPSA rule) on the marketing of livestock and poultry withdrawn or radically rewritten. There’s no word yet on what USDA might do. It has in recent months been conducting an economic impact analysis of the proposed rule after being heavily criticized by Congress for not doing so. The latest talk is that the final rule will be watered down to reflect more closely the original intent of Congress.

The industry is also fighting the federal government on the environmental front. Cattle producers already face enormous scrutiny of every part of their operation, especially if it qualifies as a concentrated animal feeding operation (1,000 animals or more). One fight is over a proposed rule from the Environmental Protection Agency to more tightly regulate dust. Should the rule pass, America’s national parks would be out of compliance. This type of federal over-regulation comes on top of the other issues that producers grapple with every day. All this outweighs the prospect of record-high cattle prices next year. Producers, especially cattle feeders, well know that record prices don’t necessarily mean profits. Given such caution and the consequences of drought, the U.S. cattle herd will continue to decline for at least another year. — Steve Kay