The U.S. beef industry, which has gone through a couple of rough years, is now positioned to benefit from a favorable supply/production situation.

What’s missing, though, says John Anderson, is demand. Consumer purchasing of beef, which nosedived with the economic recession, needs to rebound for markets to strengthen.

“The livestock sector as a whole (beef, pork, poultry, dairy) went through a very rough period in 2009 — in fact, all the way back to the fall of 2006, when we saw tremendous input price inflation starting to develop,” he said at the Mississippi Farm Bureau Federation’s Winter Commodity Conference.

“We’ve seen production contract in all these industries as a result of the tough economic conditions.”

Anderson, who is livestock economist for the American Farm Bureau Federation in Washington, says, “What we’ve been missing, especially in 2009, is consumers. They’ve been very apprehensive about the economic situation, which has affected how they spend money, even how they spend money on food.

“And that, I think, is a defining characteristic of this recession — we don’t always see cutbacks on food expenditures in an economic downturn. We don’t think of food as being very cyclical; whether the economy is up or down, people are going to eat.

“But this recession came on so quickly and was so severe in its early stages, that people did cut back on food. They still were going to eat, but they changed the way they eat — dining out less, switching to lower value or generic products — and that was reflected in lower spending on food.”

At the end of 2008, Anderson says, there was a big percentage drop in spending for food, even that purchased in grocery stores. There was a 7.3 percent drop in spending on food to eat at home.

“This was really magnified in demand for beef, a lot of which is consumed in restaurants, and consumers just haven’t been going out to eat as much. When they go to the grocery store, instead of buying ribeye they may buy flank steak, or hamburger, or no beef at all.

“All the consumer reactions we saw in the food market during this period really hit the beef industry pretty hard.

“You have to go back a long way to see that kind of drop — even in the 1980s recession, consumers didn’t cut their spending that much on food for at-home consumption. That shows how serious this recession was in the consumer’s mind and how great an effect it had on demand.”

A bit of good news, he says, is that “we’ve bounced back in food consumption expenditures the last three quarters, and I think we’ll see that continue. The food service sector has been slower to recover; we’re still looking at quarter-to-quarter declines, but there are some signs we’re turning the corner.

“When consumers come back into the markets, we should see some pretty strong improvements for livestock. The question is, when are consumers going to return? That’s the big unknown.

“The positive part of this looking forward is that people are going to continue to eat meat, and the supply situation is such that it should be supportive of our markets.”

For pretty much all of 2009, Anderson says, beef production ran lower than in 2008 — down about 2 percent. At the same time, wholesale beef prices in 2009, compared to 2008, saw a big drop.

“So, when we talk about demand, we’re really looking at how much people are buying and at what price, and the numbers tell me demand was very weak. We produced less and we had to take less for moving it.”

Going into 2010, the supply situation is more favorable, he says. “We’ve seen contraction of cattle herds, with numbers scaled back. Exports haven’t been where we’d like, but they’re improving.

We really don’t have too much product now — we just need for consumers to show up and start spending money again. Whether that happens in 2010 to the extent we’d like is going to depend on the general economy.”

The first quarter of 2009 posted a 6.4 percent reduction in Gross Domestic Product, which Anderson says, “is basically equivalent to the recession we had in the early1980s; that was probably the most severe post-war recession we’ve had.

“Third quarter GDP wasn’t bad, 2.2 percent, although there is skepticism about that number because a lot of it was coming from government spending. The real question is, will consumer spending pick up enough to take up the slack when government spending tapers off? Even though we’ve seen this resumption of GDP growth, I’m cautious about saying we’ve turned the corner in the recession. I think we need to see figures from another quarter or two.

“Unemployment has been pretty tough. We had 10.2 percent in November and 10 percent in December. For context, we had very similar numbers in the 1980s recession. Businesses have to be absolutely convinced things are getting better before they start hiring new workers in any significant numbers. I think until we see some sustained growth in employment numbers, the economy is going to continue to have difficulty moving upward.”

Industrial capacity utilization is one of the quicker things to turn around when the economy starts to improve, Anderson says, “and we are seeing it starting to bump back up.

“We’re just kind of on the bubble in terms of where the economy is, and right now is an unsettled time with meat demand — it could go either way. I think in a month or so we’ll have a little clearer indication of what to expect when we see how employment and other figures are trending.”

Beef supply for 2010 looks “very favorable” in terms of domestic consumption, he says. “In the short run, I don’t think we’ve got overly large fed cattle supplies, but in the next 30 to 60 days all the data I’ve seen indicate we’ve got enough cattle that the market’s not going to run away.

“We’ll likely see some continued market pressure for the next month or two, but beyond that the production situation should be such that the market will be well-supported ... if consumers start spending money.

“USDA data indicate that for every quarter of 2010 we’re going to have lower beef production than the year before. In the April-June quarter, the drop in production is going to be pretty substantial in percentage terms. Availability is the lowest it has been since at least 1970, and if we can get any kind of spark from the demand side, we can get into a pretty good market.”

There is “a lot of concern,” Anderson says, about losses that have occurred in the beef industry.

“If you look at budget returns, every month in 2009 returns for average fed cattle were negative. In the pork industry, returns for the average market hog have been negative for 25 of the last 27 months.

“Because of the very severe losses of equity that have occurred, cattle buyers want to be convinced that any recovery in this market is real before they get very aggressive with buying. I think there’s potential for the market to improve this year, but I see it happening very slowly because there’s just not enough equity out there for people to be very aggressive with buying.

“If we get a little help on the demand side, I think we could see prices look a little more like 2007, when we were about $5 or $6 higher for feeder cattle than we are now.”

There is potential for further reduction in feed grain prices over the next year, Anderson says.

“USDA’s recent supply/demand estimates indicate a record corn crop in 2009; South America has a big soybean crop coming on. As a result, I think we’ll start to see a pullback in grain prices in the second half of the marketing year, and that prices will stay fairly moderate or even come down a little more from where they are.”

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