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Will The 2012 Drought Reshape Our Industry?

Will The 2012 Drought Reshape Our Industry?

Corn has risen in price by more than 45% in less than 30 days, while feeder cattle have fallen by nearly $25/cwt. or nearly $200/head. Fed-cattle losses are swelling, and calf prices are shrinking, as liquidation has once again been triggered, distorting the historical placement patterns. What was initially a very optimistic outlook for 2012 has definitely soure [3]d.

These are all short-term effects, but last year’s drought in the Southwest [4] had already depleted feed reserves and decreased whatever cushion was available in the system. Today’s prices are declining while input costs are skyrocketing, and demand continues to weaken as a result of an anemic domestic economy.

These conditions are certainly no recipe for expansion [5]. The focus now becomes just how far the industry can contract without beginning to lose major infrastructure [6], which would affect its ability to ever return to the size and scope it once was.

Our federal deficit shows no signs of abating, but still Congress continues to maintain price-distorting policies that mandate that the ground that used to feed the world be converted into an expensive and inefficient means to produce energy – ethanol. How long will consumers be content to shoulder the long-term debt of the current federal deficit, as well as pay through the nose at the retail case, to support this system? Will beef ever regain the market share it will lose as the industry continues to consolidate?

There are a lot of questions, but not a lot of answers at this point. When the subsidization of ethanol began, it was assumed that the beef industry would have to shrink by 10% or more, but the addition of drought has magnified the impact and risks.

Now, the question that everyone is asking is: “How small will our industry have to go to return to some level of economic balance?” All that can be said right now is that it must become smaller than it is today.