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The Prediction Is Pain

In the film Rocky III, champion Rocky Balboa's nemesis is the fearsome contender Clubber Lang, convincingly played by Mr. T. When asked in a pre-fight interview for his prediction, Lang scowls into the camera and growls: That's not unlike economist Bill Helming's economic prognosis for the next few years. But despite the anxiety, the price and the pain inherent in the upcoming fight, there is opportunity

In the film “Rocky III,” champion Rocky Balboa's nemesis is the fearsome contender Clubber Lang, convincingly played by Mr. T. When asked in a pre-fight interview for his prediction, Lang scowls into the camera and growls: “Pain.”

That's not unlike economist Bill Helming's economic prognosis for the next few years. But despite the anxiety, the price and the pain inherent in the upcoming fight, there is opportunity for beef producers who are up to the challenge, he says.

“Looking out over the next 5-10 years and beyond, I think the beef, pork and poultry industries are going to look different than they do today because someone is going to go without, and I like the beef industry's position the best,” the Olathe, KS-based Helming says.

“There will be opportunities; not a single opportunity, but multiple opportunities, for producers to develop various economically-driven supply agreements or partnerships,” Helming says. “These arrangements will give the cow-calf operator an opportunity to add value and compensate for the lost revenue and value that higher energy and grain costs will continue to exert on the market value of their cattle.”

Unlike anything else

First off, whether you call it a “downturn” or a “recession,” the current doldrums are unlike any other economic vagary ever seen, Helming says.

“What the U.S. and global economies will be struggling with for several years is simply paying the price of living beyond our means at all levels,” he says. “We are in a serious liquidity and credit crunch. When it's all said and done, I think people will look back and say, ‘this was the most serious and difficult economic period we've seen in over 50 years.’ ”

In the short term, he expects flat to sub-par economic performance for all of 2008 and 2009. He doesn't see a bottom to the real-estate market until at least the end of 2010.

But even once those challenges have passed, the days of business as usual are gone, the casualties of major and long-term structural and foundational shifts in domestic and global economies.

“We've been spoiled in the U.S. with a long history of cheap food and energy. One of the fundamental shifts underway worldwide is toward higher energy and food costs. And all producers of agricultural and food products, as well as consumers of those products, will have to get used to it,” he says.

While many blame biofuels for runaway energy prices and food shortages, Helming believes it's “a lot less than 10%” of the cause, as are a weaker dollar and weather woes. The “major enchilada,” as Helming terms it, are demands for energy and grain that are outpacing available supplies.

“Only 4% of the world's population is located in the U.S., and the other 96%, while largely on a lower rung of the economic ladder than the U.S., are nonetheless growing and climbing that ladder,” Helming says. “The fact is when people can afford a better diet, that usually means more protein, and that takes more grain. China is today a net importer of corn rather than a net exporter, and the Chinese are consuming dramatically higher levels of energy and food, as are India and Russia.”

While higher-priced and shorter supplies of grain are hardly a positive for U.S. beef producers, the beef industry is better suited than its protein competitors to withstand the challenge, he believes.

“Poultry and pork producers have to use corn and meal. They really have no choice. Conversely, between 50% and 60% of the finished weight of a fed steer or heifer is on forage. That's a definite competitive advantage.”

In addition, Helming says U.S. beef has seen a demand surge in the past decade, with consumer purchases indicating a willingness to pay more for beef. “I believe that overall consumer demand domestically for beef will hold up reasonably well, though it will be impacted negatively to some degree,” Helming says.

But the most promising factor lies in exports. “Our competitive advantage in the U.S. is producing grain-fed, high-quality beef. While the U.S. population is growing, the rest of the world's population is growing even faster, while slowly climbing the economic ladder. Of that 96% of the world's population outside U.S. borders, only a small percentage will be capable of buying, or will want to buy, U.S. beef, but it doesn't take very much to make a difference. I'm very optimistic that over the next five years, U.S. beef exports could climb to as high as 12-15% of total production,” he says, compared to the current 4-5%.

Here are other projections:

  • Corn

    Helming's best-case scenario for the next five-year period is for an average farm price ranging from $4.50 to $7/bu. on an annual basis, with an average price, assuming good weather, of $5.50-$6.

  • Energy

    Fluctuating prices ranging from $90-$140/barrel over the next two years.

  • Live fed-cattle prices

    Looking through the end of 2009, Helming's best-case scenario is an average in the $94-$98/cwt. range, ranging from a monthly average of $90 to $105. His worst-case scenario through the end of 2009 is $90-$94, with an average range of $85-$95.

    Looking at a five-year period, his best-case scenario is an average of $100-$110, with the range between $95-$115. His worst-case scenario is a $95-$100 annual average, with prices ranging from $90 to $105 on a monthly basis.

  • Consolidation

    He calls consolidation “the name of the game at all levels.”

In 1950, total beef production (beef and dairy) per cow was 228 lbs.; commercial cattle slaughter carcass weight as reported by USDA was 519 lbs.; and total beef production was 9.248 billion lbs. In 2007, those figures were 629 lbs., 776 lbs. and 26.421 billion lbs., respectively.

What's more, that prodigious efficiency and production boost came with relatively the same national herd size. In 1950, the total U.S. beef and dairy cow inventory reported by USDA was 40,596,000 head. On Jan. 1, 2008, it was 41,777,000.

“We had the lowest calf crop in 2007 since 1951, so how in the world did we increase productivity so much?” Helming asks. Better genetics, larger cattle and more efficient production systems, he says. Also in 1950, 25% of the beef calf crop were non-feds; today, all beef calves go through the feedlot.

And higher grain costs, which will encourage more forage feeding of cattle, shorter on-feed periods, and the conversion of grazing land to crops will assure a further shrinking national herd, Helming says.

“The price of a calf, a stocker animal or yearling is going to be significantly less than what it would otherwise have been given the beef supply and the cattle inventory because of the price of grain. The price of grain isn't coming down,” Helming says.

Meanwhile, the cattle-feeding sector will continue to dramatically consolidate. “Among feedlots historically dependent on custom feeding, many will recognize those days are largely gone. If they're to have any semblance of a full feedlot, they'll have to own the cattle, or partner with selected cow-calf operators, beef packers, or a combination of the two.

“And the same is true for the beef-packing segment, also suffering from over-capacity. They'll have no choice but ally with cattle feeders and/or producers. And it's all driven by the same set of economics.”

All in all, Helming says he's optimistic about the industry's future. His biggest concern over the coming months and years is the role of government.

“Government and government policy could make things much worse over the next five years. Whether that's in farm bill policy, trade policy, energy policy, tax policy, etc., all these things are interrelated and affect agriculture and the food industry.

“There's that whole element of unintended consequences, and I can see the government doing a lot of things to make things even tougher than they otherwise would be just because it thinks it has to do something, which frankly turns out to be worse than what we already had. And that's a big worry.”

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