The Dark Cloud Of Tighter Numbers

Tight supplies, higher prices and higher input costs are the fundamentals of the marketplace we are experiencing today. Along with higher costs, we have increased volatility and risk, especially associated with energy costs and feed costs.

As cattle producers, we have a tendency to get excited about entering into new and higher trading ranges. Nobody is arguing we need higher prices to cover the higher costs and increased risk that we all face. The problem is that this new price trading range isn’t due solely to increased demand.

Excess capacity in the feeding and packing industry has helped – along with tighter numbers – drive prices higher. And, demand has been solid given the current economy, though a lot of this demand increase has come from the export side, which without question is the brightest part of the demand side.

In fact, exports this year are expected to exceed pre-BSE levels. What is exciting is that our two biggest markets prior to BSE – Japan and South Korea – still have lots of potential and have been replaced by Canada and Mexico. Of course, the downside to the strength in the export market is that much of the strength is due to the U.S. dollar’s decline. What’s more, crucial free-trade agreements (FTA) continue to be held up in Congress, threatening to put U.S. producers at a significant disadvantage if Australia and other competitive nations complete their FTA before we do ours.

So, while we are looking at historically high prices, there is also concern about the ramifications of these tighter supplies. Per-capita consumption is expected to fall to around the 50-lb. level; it wasn’t all that long ago that per-capita consumption in the U.S. was in the mid 60s.

The question is how do we get that market share back? Historically we haven’t been able to regain per-capita consumption after precipitous drops. In addition, the price differential between beef and poultry is increasing, making industry concern about budget-constrained substitution very real.

The question isn’t whether we’ll have high prices the next 4-5 years. Rather, the question is what will our industry look like in 10-15 years if we fail to gain crucial market share and/or prolonged tight supplies shrink valuable infrastructure to the point we aren’t able to compete?

TAGS: Marketing