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The Best Of Times, The Most Frustrating Of Times

The fed market continued to display its strength as fed cattle traded at $90/cwt. again this week. And, there's little sign of weakness as nearly every month except October has set new contract highs.

The fed market continued to display its strength as fed cattle traded at $90/cwt. again this week. And, there's little sign of weakness as nearly every month except October has set new contract highs.

The feeder and calf markets continue to follow suit. It appears that, by this fall, the industry will have recorded the two most profitable years in its history.

Usually when a market reaches such lofty heights, the risk is to the downside. A review of the market fundamentals, however, indicates that moving higher yet may be the more likely scenario.

There are several factors that helped the market attain its current levels. Certainly, supply is one. The longest cattle cycle in history has been extended by drought, and outside influences such as the discovery of BSE in Canada and the terrorist attacks of Sept. 11, 2001.

In addition, feeder-cattle prices have continued to pull into the mix heifers that normally would be kept back as replacements. As a result, expansion has yet to begin in earnest. It's important to note that when expansion occurs it will actually tighten supplies even more in the short term.

Certainly, the decrease in beef tonnage from Canada tightened supplies even more last summer. And, the import restrictions on live cattle have continued to decrease available numbers domestically.

The feeding industry also has remained extremely current in its marketings, which has driven down carcass weights and increased that segment's market leverage. Record profitability, and a board that until two weeks ago continued to discount the deferred months, helped encourage marketings, as did rising corn prices.

Yet, any contention that this market is supply-driven is inaccurate. After all, net beef supplies aren't down dramatically, and most analysts believe the loss of U.S. export markets has taken $12-$15 off the price we would have if our export markets were still open.

No, this is largely a demand-driven market, and it's really exciting considering that this demand growth appears to be part of a long-term shift that still is gaining momentum.

Normally, a rise in corn prices exerts significant downward pressure on calf prices. This time around, however, other positive forces have offset the rise in corn prices.

The increased demand for corn also appears to be part of a long-term structural change, as demand for alternative uses for corn, such as ethanol production, continues to surge. But, the 2004 corn crop went in under excellent conditions. With continued good weather, it will be interesting to witness the yields possible given the recent improvements in corn genetics.

On the positive side, cattle supplies are expected to continue to tighten, especially as expansion begins. Demand continues to improve. And, while U.S. export markets have been slow to reopen, indications are they will return, but over an extended phase-in period. While it will take time to rebuild our export markets, given the growth of Southeast Asia, and China in particular, the long-term outlook is tremendous.

In addition, the branded revolution, the movement to value-based marketing pricing systems, and the improvements in genetics are improving both the quality and consistency of our product.

On the negative side, the reopening of the Canadian border is expected to take several dollars off the fed market (short-term overreaction from a psychology standpoint could be even more). The removal of premiums in the deferred months and higher breakeven levels will make it more difficult to remain as current as we have been. And, adverse weather conditions in the Corn Belt could pressure feeders and calves.

Anti-beef groups, shaken by the recent demand growth for beef, have redoubled their efforts to shake consumer confidence in the health and food safety aspects of eating beef. In addition to the hit from losing our exports, the increased costs as a result of BSE are estimated to be $30 or more/head. That means we're $180 or more lower than we would have been prior to BSE.

Of course, the big bogey man remains the potential of finding another U.S. case of BSE. And, the loss of the checkoff, should the U.S. Supreme Court rule against it, could also short-circuit demand growth.

All in all, however, the positives seem to outweigh the negatives.

The interesting thing about this period of record profitability for all production segments is the frustration level that remains, especially in the cow-calf segment. Uncertainty seems to have increased, and drought and increased price volatility has affected attitudes negatively. And while profits have been large, net profit has not increased as much because of the simple fact that fewer pounds are being produced.

Internal industry politics and the corresponding rhetoric have been very negative, with the focus being on problems rather than solutions. The tension between two distinct visions for the future of the industry -- value-added vs. commodity-based -- has reached the tipping point. So, despite record price levels, the beef industry finds itself caught in an election-year type of climate where the negatives are being accentuated.

Perhaps it would be a good thing to sit back and look at all the positives in the marketplace. The bottom line is that, despite the turmoil of the past 24 months, there's more to be excited about in the beef industry there has been in a long, long time.