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As Economies Spasm, A Nervous World Watches

As the U.S. House of Representatives considers a sweetened financial bailout package, the rest of the world watches nervously to see how the U.S. salts the blackening

As the U.S. House of Representatives considers a sweetened financial bailout package, the rest of the world watches nervously to see how the U.S. salts the blackening storm clouds looming on the economic horizon.

“This isn’t a U.S. problem. This is a global problem,” says Gregg Doud, chief economist for the National Cattlmen’s Beef Association. The U.S. is feeling it first because it has by far the biggest economy. “But the Europeans are already talking about the fact that they’re going to have to do a similar thing,” he says.

In fact, world markets are already seeing some nervousness. “One of the areas of equities that has been decimated has been the global emerging markets,” Doud says. “Emerging market stocks have been totally decimated.”

That, Doud says, is demand destruction. It’s happening here at home as well, and it will affect cattlemen in some very direct ways.

A look back at recent history in commodities futures shows a lot of red days. “It doesn’t matter what commodity we’re talking about, it’s had the heck beaten out of it,” Doud says. “That’s demand destruction. And that is not a good thing for agriculture” because that investment in ag commodity prices is flowing away from ag producers.

Of significant concern to cattlemen, says Jim Robb at the Livestock Marketing Information Center in Denver, is the ag credit situation. Short term, that will be felt most by cattle feeders, because that segment of the industry relies heavily on short-term money. “The risks here are much greater than they were a few weeks ago in terms of the availability of capital to finance cattle feeding, and the interest rates that are available,” Robb says.

That will make an already-challenging cattle-feeding environment even tougher. The first six months of 2008, cattle feeders lost more money—about $1.5 billion—than they lost in any period in the history of cattle feeding. “Here’s the real worry,” says Don Close, market director at the Texas Cattle Feeders Association in Amarillo. “Given the performance in cattle feeding we’ve seen year to date, a lot of these guys are really deep into their credit lines. If lenders start tightening up credit, start taking any of that away, they’re already so far into their credit lines that there’s nothing left. If credit becomes a driving issue, we’ll see way fewer numbers on feed just because there’s not a credit line out there to support it.”

While Close says he hasn’t seen evidence of that happening yet, there is some anecdotal evidence that lenders are tightening the equity requirements for individual borrowers, asking for more money up front on a pen of cattle.
Ultimately, cow-calf producers will feel a similar credit pinch, in addition to a market reaction as the demand for feeder cattle cools off. In fact, that red ink river is already beginning to back up. Doud points to the October feeder cattle futures, which have dropped from $118 to $100 in the last two months.

Another area that will be problematic for ag, and particularly for cattlemen, is the export market. “Our export demand this summer was very solid,” Doud says. However, since July 1, the dollar has appreciated at a torrid pace historically. “The U.S. dollar has appreciated 21% against the Australian dollar, 19% against the Brazilian real, 13% against the Korean won, 9% against the European euro and about 5% against the Canadian dollar. That 13% in Korea makes our beef 13% more expensive to the Korean consumer than it was the first of July. That’s a problem.”

Long term, the economists admit they don’t know what will happen. But they do know it will take time, likely measured in years, for global economies to heal from the wounds they have already sustained and those yet to come.

“You’re going to see global economic slowdown and global demand destruction,” Doud says. “Even though U.S. ag financially is on the most solid footing it’s ever been on, this situation is problematic for us. And it will potentially have lasting effects.”