If you’ve ever enjoyed a modest financial windfall on the same day your pickup was towed to the shop for some unknown but likely expensive repair, then you understand the murky state of today’s economy.
“We believe the recession is over and the nation is in a fragile recovery phase that began in third quarter 2009,” says Andy Gottschalk, a veteran agricultural analyst and commodities broker who provides agricultural market analysis and risk management through his firm, HedgersEdge.com, LLC. “But the rate of recovery to date has been about half what would be expected coming out of a severe economic recession.”
As of the March 2010 reporting period (the most recent at the time), Gottschalk explains, domestic household net worth was still $10.3 trillion below its prerecession peak.
“U.S. consumers have emerged from a cold economic winter,” he says. “But, there’s little indication they’ll return to prerecession spending habits; thus, economic gains will be slower to be realized than in previous recoveries.”
“Worldwide, many people are hanging their hats on the growth of the Chinese economy,” Gottschalk says. “However, China is facing a Catch 22, needing to decide whether to continue growing its economy and risk inflation or apply the brakes and risk high unemployment.”
Gottschalk says that in order to service its government programs and maintain unemployment rates its leaders view as tenable, the Chinese economy must grow at an average annual rate of 8%. China’s gross domestic product (GDP) grew at an annual rate of 11.5% during the first quarter this year.
China has been able to maintain such heady growth despite the international financial meltdown by flooding its economy with money. According to Gottschalk, new bank lending there increased $1.7 trillion from Jan. 1, 2009, through February 2010. In sharp contrast, bank lending in the U.S. is still contracting, limiting the rate of economic recovery here.
The Chinese tossed another $500 billion or so of government stimulus at the problem. So, you’re talking $2.2 trillion of fiscal and new bank lending stimulus in a nation where the total GDP last year was only $4.7 trillion. Conversely, U.S. GDP last year was $14.6 trillion, about three times greater than China’s.
You can’t underestimate China’s importance to the world economy; its middle-class population numbers about the same as the entire U.S. population.
Nor should anyone overstate China’s economic significance. Gottschalk explains, “Per-capita income disparity between China and the U.S. is wider than the oceans separating the two countries – about $3,677 in China vs. $46,700 in the U.S. Even adjusting for the differing population base, it will be many decades before China can achieve income levels remotely close to that of the U.S.”
Moreover, Gottschalk points out the U.S. accounts for about 25% of total global GDP, China only 7%. “The U.S. remains the engine that pulls the global economy, despite what you hear,” he says.
Tight cattle supplies
A recovering world economy – as well as stabilized domestic consumer beef demand – go a long way in explaining the remarkable reversal in U.S. cattle and beef prices since the first of the year.
By the first week of May, average calf and feeder prices were $12-$15/cwt. higher on a regional basis. Fed-cattle prices could average as much as $10/cwt. more this year than last. According to Gottschalk, about half the gain stems from reduced per-capita domestic beef supplies, while the other half comes from improving domestic and export consumer beef demand.
Beef supplies will get tighter, too. “There is no herd expansion in the U.S., Canada or Mexico and very little herd expansion globally,” Gottschalk says. The Jan. 1 beef-cow inventory for the U.S. and Canada was down 1.4%; that follows last year’s 2.8% decline. The combined U.S. dairy and beef-cow inventory was down 1%, making for the smallest total cowherd since 1952.
Though domestic beef supply fundamentals promise to remain bullish for the next 2-3 years, and could offer opportunity to defer some cattle marketings, Gottschalk cautions there is no compelling reason to ignore the typical seasonal price patterns.
With cattle numbers so tight and fed-cattle marketing more current this spring than some folks can recall in three decades, consumer beef demand is left to determine the fortunes of the cattle business during the next 12-18 months.
Though Gottschalk expects domestic consumer beef demand to end this year about 5% higher than last year, likely record high retail beef prices will test consumer mettle this summer.
“Retail beef prices lag cattle and wholesale beef prices on the way up and on the way down,” Gottschalk says. He explains retail prices through the end of March had yet to reflect fed-cattle prices at or near the $100 mark. As retailers ratchet up prices to catch up with wholesale cost, consumers will face higher product costs. According to the USDA Economic Research Service (ERS), retail beef prices were unchanged from the prior year.
ERS reports beef prices increased 1% in March – month to month – but were unchanged from March 2009.
The current record-high retail price for all fresh beef was $4.11/lb. in 2008, Gottschalk says. After declining to a low of $3.79/lb. in July 2009, the all-fresh-beef price climbed to $3.95 by the end of March 2010. Chances are prices will hit record-high levels this summer at exactly the time of year when selling beef to consumers is typically most challenging.
Looking down the road 12-18 months, Gottschalk says, “The hazard to not only the cattle market but also competing proteins is that we have an economic disruption such as in the financial sector that impacts product demand.”
Tottering economies in Greece, Spain, Portugal and Italy have received most of the attention so far. But Gottschalk says there’s growing concern for Eastern European countries where growing interest rate spreads are signaling ongoing economic challenges.
“The risk to the cattle market is mostly on the demand side, not only domestically but also internationally,” Gottschalk emphasizes. “We have to pay more attention than ever before to what’s going on in other parts of the world.”
Eyes On Asia
“One year after the deepest recession in recent history, Asia is leading the global recovery,” says Anoop Singh, director of the International Monetary Fund’s (IMF) Asia and Pacific Department. “Key economic indicators are now growing at or above long-term trends not only in China, but in emerging Asia’s other economies with a large domestic demand base, like India and Indonesia.”
Singh says two primary factors are boosting Asia. First, the global and domestic inventory cycle is likely to boost Asia’s industrial production and exports for most of 2010 as demand recovers in advanced economies. And, although macroeconomic policies may become less accommodative in the region, private domestic demand is projected to remain robust thanks to sustained consumer confidence, high asset values and a return of capacity utilization to more normal levels.
IMF’s regional economic outlook (REO) for the Pacific and Asia says risks to the region include the fragile global economy and the region’s reliance on foreign demand. But, IMF analysts say the more immediate risk is that market concerns about sovereign liquidity and solvency in the Euro zone could turn into a contagious sovereign debt crisis.
Even after the European Union rolled out a $1-trillion financial rescue package for tottering members like Greece, international financial markets continued to waver as the euro gave ground to the U.S. dollar.
The REO says Asia’s relatively strong cyclical position also ironically poses near-term risks to the region, if growth and widening interest rate differentials with advanced economies spawn capital inflow to the region.
“This could lead to overheating in some economies and increase their vulnerability to credit and asset-price booms with the risk of subsequent abrupt reversals,” the analysts say.