Keep an eye on the U.S. and global economies, rising unemployment, the dollar, private debt de-leveraging, the bursting credit and loan default bubble and price deflationary forces, consultant Bill Helming of Olathe, KS, advises beef producers.
“A great deal of what happens on the commodity end, whether it be corn, cattle, competing proteins, crude oil, etc., will be heavily impacted by these factors. We're in an environment that likely will last at least 1-3 years, and in which the dollar is stronger, not because people are bullish on the dollar per se, but because they're more bearish on other world currencies. Most people are significantly underestimating the severity and length of the U.S. and global economic downturn.”
The result will be reduced input prices in 2009 — corn trading at $2.25-$4.25/bu. and gasoline at $1.25-$2.25/gal. Likewise, he anticipates average annual cattle prices in the $80-$90/cwt. range for fed cattle, $77-$87/cwt. for feeder cattle and $85-$95/cwt. for calves in 2009.
“With the U.S. and world economies in a de-leveraging process, the very nature of that means it will be deflationary, and the dollar will likely remain the stronger currency. A weakening dollar will have a whole different impact on these commodity prices. Everything will rise, but that's at least 1-3 years off and perhaps longer,” he says.
The downside to a deflationary climate and a stronger dollar is decreased demand for higher-priced cuts of beef, both domestically and for export. Conversely, there will be increased demand for ground beef, which will prop up prices for cull beef animals, which will in turn further increase beef cow liquidation.
“People are eating out less and preparing more at-home meals. Though beef and competing meat supplies will be down and tightening in 2009, sharply higher levels of unemployment and consumer wealth destruction resulting from declining home and stock market values will result in some demand destruction for beef and other competing meats,” Helming says.
Lower calf prices will facilitate lower cattle prices. “There will be some great opportunities for those with stronger balance sheets to increase their inventory and buy cattle quite a bit cheaper than they otherwise would be able to. Eventually these cattle prices will go back up again.”
The same goes for the feedlot side, with economic conditions forcing more sellers than buyers and reduced sale and purchase prices for feedlots, he adds.
“There also will be substantial opportunities in the short run — the next few months to several years — due to the periodic and temporary weakening of the dollar — to take advantage of occasional rallies in the stock and commodity markets to lock in advantageous forward contracts,” he says.
Look to cooperate
All cattlemen have to be lighter on their feet and more sensitive to a broader number of market supply and demand forces for beef, pork and chicken, he adds.
“If ever there was time for folks in the beef industry to look more toward partnerships and alliances, it's now. It's not easy and it's not a panacea, but such arrangements can allow producers to potentially extract an extra $10-$35/head, which means a lot in a market like this,” he says.
He sees significant opportunities for cow-calf producers via retained ownership arrangements. “By retaining partial or full ownership, ranchers can capture more value by working out arrangements with cattle feeders who work out arrangements with beef packers.
“Call it vertical cooperation, vertical alliances or cooperative partnerships, but these economically driven arrangements allow ranchers and stocker operators to remain independently owned and operated while taking advantage of the benefits of price differentiation and value discovery,” Helming says.