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Beefs and Beliefs

Record Beef Prices Giving Me The Jitters

I love the profit potential in the beef market complex but I worry about producers who don't have risk protection.

 

I continue to have doubts about the robustness of beef demand in the face of record-high beef prices.

Don't misunderstand: I'm tickled to death about the room for profit margin in these prices. I just fear that any moment the consumers will cut back on their protein consumption. It wouldn't be the first time, after all.

I think I should lay out some facts I've been gathering, however.

Many things look good for beef. For example the lack of competition. Neither pork nor chicken producers have mounted much of a response to high prices yet. The pork industry has been struggling with porcine epidemic diarrhea (PED) virus and I think that has kept them at bay to some degree. But I was looking at the June USDA reports on chicken and their production is almost flat, too, despite record chicken prices.

The June 25 report from National Ag Statistics Service says total broiler slaughter is down 3% from 2013. The poultry producers were not increasing hatching of broilers at the end of June, either. Broiler growers in the United States weekly reporting program placed 174 million chicks for meat production during the week ending June 28, which was down slightly from a year ago.

You can read the entire USDA data set on livestock production on the Economic Research Service website.

A secondary analysis of poultry statistics is on the poultry site.

All this data implies consumers will find little relief from high beef prices by swapping to other proteins, at least in the short run.

Meanwhile we're still hearing relatively rosy economic predictions reports across the beef industyr industry.

Rabobank’s Food & Agribusiness Research team says the global beef market will "regain its positive momentum" in the third quarter, once the current high supply has worked through the system. Rabobank analysts say this will likely support further strengthening of prices, as supplies of competing animal proteins tighten.

Right now I'm also working with the Beef Checkoff folks for my September marketing issue and looking at beef demand studies at retail and in restaurant trade. There, the level of refusal due to high prices has only increased a little among consumers shopping for ground beef at the grocery store. Now, considering ground beef has become the top market for beef, such news isn't a good thing, but by late spring it was only a small increase.

However, look at John Otte's Livestock Exchange column in the web exclusives section of www.BeefProducer.com. In a conversation with Florida-based market analyst Kevin Hackett, our livestock market analyst suggests we may be seeing market tops. Hackett adds that the parabolas forming on the livestock charts are classic, longstanding formations signaling market tops.

Last, I'll mention that Bill Helming's latest newsletter brings up several worrisome facts. Among them is a radical uptick in confidence by consumers and beef producers alike. All this comes at a time when economic indicators do not support such buoyancy.

Helming says, "Most consumers, families, business owners and managers, banks and financial institutions, investors, economists, financial, commodity and real estate brokers and advisors, elected government officials, plus central banks and their policymakers (in the U.S. and globally) are today more out of touch with reality than ever before."

"There is currently a very false and artificial general sense of security relative to the U.S. and global economy and financial system. Many people simply do not see or have decided to simply ignore the serious economic and financial dangers ahead over the next seven to 10 years," Helming says.

"The truth and reality is that the US and global financial system is a giant pyramid scheme that is primarily based on debt obligations, leverage and paper promises that cannot be met. This massive debt pyramid will end up crumbling and crashing."

Further, Helming says, total global debt is currently three times larger than total global GDP and the obligations (total real debt) of the US government alone is 823% the national GDP.

Helming adds that the total amount of government debt around the globe has increased by 40% since 2008-2009, and the "too big to fail" banks across the world have collectively gotten 37% larger since 2008-2009. This and other facts, he says, means politicians who have claimed they solved the financial crisis have not fixed anything, but have just staved off the reckoning while allowing the problems to grow larger.

Helming outlined another bubble that has been formed by lack of regulation and market manipulation: It is the derivatives markets which his figures show totals $995 trillion globally. A derivative is a financial instrument or security which is based on the price of another asset. Derivatives are most often highly leveraged instruments.

The US government and the US Treasury Department says the top 25 US banks have derivatives exposure of nearly $237 trillion, with combined assets of only about $9.4 trillion. This says those largest banks have a leveraged ratio of roughly 25:1, which is a frightening number.

"Clearly this is not going to end well," Helming says. Yet he has been predicting the comeuppance for several years now and continues to forecast only that he expects these problems will to come to a head sometime in the next seven to 10 years.

I feel certain he is correct. I only have two questions:

1. How long can those who control the money stretch out the current limbo we live in?

2. Will the dominoes will fall one at a time as did the housing bubble, or will they trigger fall upon fall?

Ultimately, I think this means from this point forward you should always cover your risks with some form of reliable contracting or call options. Protecting capital is a key component of wealth building and all business people, even beef producers, are in the business of building wealth.

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