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The Beef Angle

The Dog Days of Summer Outlook

The Dog Days of Summer Outlook
It's hot and dry; corn is expensive and beef demand is soft. Here's a look at what the market forecast holds for beef producers in the coming months.

I don't know about you, but where I live, it's doggone hot, and too darn dry.

I'm a farm kid - we don't water grass... Unfortunately, I live in the suburbs, which means that all the retirees on my street DO water their grass, which means my yard is much too brown to keep up with the proverbial Jones'.

An historical look at beef cow numbers, courtesy of the University of Illinois.

The problem, in a very real sense, is that it's too dry in a lot of places, and no shortage of digital ink has been spilled in recent weeks over the challenges to forage and feed production. Corn and soybeans on the big board are higher than a cat's back, because traders are starting to realize that the extended drought seen across the Corn Belt means that we will likely not see the bin buster USDA had anticipated when releasing its early-season outlook some months ago.

Yes, corn acreage is the largest it's been since 1937, but those acres aren't going to produce the 166 bushels per acre originally anticipated. With record-tight corn stocks and record-tight soybean stocks (more or less), feed products aren't going to get cheaper any time soon.

Oh, and your pastures probably look really bad right now.

Meanwhile, a recent survey conducted by National Public Radio suggests that consumers are changing the way they feel about consuming meat. This shouldn't come as a surprise, given the long-term campaign waged against red meat by many in the medical academy and the anti-agriculture lobby. We've been told for decades that eating mea, milk and eggs would eventually kill us, while destroying the environment, too.

Despite declining cattle numbers, total beef production increased until 2002. Graphic courtesy of the University of Illinois.

In recent months we've also had the challenge of a consumer bombarded with anti-beef stories like the LFTB (dare I say "pink slime") debacle, which certainly dinged meat prices earlier this year.

Despite some of those challenges, the second half of the year could be better than the first, according to some key indicators. In May, Rabobank's Food & Agribusiness Research and Advisory group released its 2nd quarter beef and cattle outlook, suggesting that while fed cattle prices traded at all-time record levels in the first three months of the year - peaking at $1.30 in early March - the April-June period would be weaker for a variety of reasons.

"Restricted supplies and seasonal considerations should drive a price recovery," in the second half of the year, according to David Nelson with Rabobank. The report's author said prices would linger near $1.15 through mid-summer, and then recover sharply in the latter half of 2012. "The live-steer-price-to-cutout-value ratio has been unsustainably high, confirming poor packer margins, driving the reduction in slaughter."

A larger supply of cattle in Brazil should dwindle toward a more typical supply by end of the quarter, Nelson observed. Beef production in the U.S. was down 3.4% through the first four months of 2012, despite higher carcass weights over the same period a year ago.

While U.S. demand patterns may shift, as the NPR survey suggests, global demand for higher-quality proteins will continue to grow as the middle class around the globe expands. The supply of cattle in the U.S. to meet that demand, meanwhile, is changing, reflecting a number of macro-trends in the industry.

No one doubts that drought in Texas in recent years has changed the bovine landscape in the Lone Star State. Nationally, the beef cow inventory - the productive factory, if you will, from which our fed cattle population is calved - is smaller than it's been in 50 years. Literally.

A sustained downward trend in beef cow numbers coincided with an overall growth in beef production until more or less 2002, as faster growth rates and improved efficiencies allowed the industry to produce more meat on fewer hooves (see Figure 1). Heavier carcass weights, among other things, allowed us to do more with less for 30 or 40 years (see Figure 2). That trend reached a level of relative equilibrium about 10 years ago, meaning cattle numbers again have a real impact on the cattle and beef markets.

As University of Illinois economist Paul Peterson noted last month, consumers, retailers and restauranteurs largely avoided any pain from declining cattle numbers until recently, because they dealt in pounds of beef rather than numbers of animals, while feeders and processors felt the pinch of tight cattle supplies and excess capacity.

"Over the long run, too few cattle forces feedlots to close and packing plants to shut down, sending reverberations up and down the supply chain," Peterson wrote. "The alternative is to rebuild the beef cow herd." He said step one was for cowboys to hold onto replacement heifers, which may have been happening - at least on a very small level. 

With high feed costs, strong cattle prices, unpredictable weather, and the ravages of drought felt across cow country, I suspect a number of older producers are considering cashing in their chips wile the gettin's good. Which will likely feed the cycle even further.

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