March 3, 2009
Recession, feed cost to leave deep US livestock production scars
Scars inflicted on US livestock growers by a deep recession and pricey feedgrains could take months or years to heal, and may result in smaller animal herds, prolonged stagnant consumer demand and the loss of some meat protein producers from the sector, industry analysts say.
US companies that churn out beef, pork and chicken started getting squeezed financially almost three years ago when they and ethanol manufacturers began competing for corn - the main ingredient in livestock rations.
Corn at the Chicago Board of Tradeis currently trading in the mid-to-high US$3-per-bushel range. Although the golden grain has shed more than 60 percent of its 2008 summer highs, it still remains relatively expensive historically.
Costly corn virtually wiped out hog farmers'' bottom lines that took them almost four years to build. Poultry producers spent US$9 billion more on feed in the past three years than what they would have if feed prices have remained within their historic range.
And, cattle feeders are losing an estimated US$150 to US$300 per head due to diminished beef and beef by-product demand.
Livestock processors are also getting slammed as a result of a sputtering economy that has left consumers searching for ways to tighten family budgets.
Industry observers agree that a meat industry turnaround is on the horizon, but they are unsure when that would happen. Until then, those who serve protein to a discriminating public will themselves have to swallow the bitter pill of unprofitability for at least the foreseeable future.
University of Missouri livestock economist Ron Plain cited US government forecasts for a drawdown in pork, beef, chicken and turkey production for this year versus a year ago. It would be the first time that all four protein sectors will show a year-over-year decrease since 1973 which, he asserted, is directly tied to high feed costs and soft meat demand.
"We may well see an additional cut in production in 2010, but that depends on how quickly we can stabilize the economy," said Plain. "But right now, the financial outlook is not very bright for meat producers in terms of growth coming anytime soon."
The cost of feed has led to a 3 percent reduction in US hog herds versus a year ago. According to Plain, in some instances lenders rather than pork producers may be calling the shots as far as how long herd reductions will last.
"We''ve got banks who are thinking in terms of permanent cutbacks, and even some of these operations are looking at new ways of trying to make a living," he said. "As the red ink drags on and the longer they lose money, more of them are going to be forced to make some rather permanent plans to downsize."
Plain said he is not aware of hog producers bailing out of the business because of the current economic and demand situation. However, he does expect to see "several cases" in 2009 in which firms that are in deep trouble would be bought by others for 50 cents on the dollar.
US broiler production so far this quarter is down about 5 percent to 6 percent compared with the same period a year ago due to exorbitant feed costs. And, if the trend continues, the chicken industry may face its first year-over-year production deficit since 1975, said Richard Lobb, communications director of the National Chicken Council.
Corn is still priced fairly high and some companies have been able to offset expensive feed costs by passing them on to customers while others have not, said Lobb. But, he said, the price of corn may be less an issue for producers than trying to hedge it on the CBOT''s volatile futures market.
The rules of the game have not changed, said Lobb, because the amount of ethanol that is required as a gasoline additive will continue to increase. The ethanol feedstock has to originate almost entirely from corn.
Consumer demand based on what they are willing to buy and at what price remains clouded, Lobb said. It is unclear whether customers will return to casual dining establishments - places where they are presently avoiding in droves due to financial constraints.
"I think we''ve seen the end of go-go chicken production for the time being," said Lobb. "Companies are going to be cautious and will try not to produce chicken that they don''t have a customer for."
The global recessionand dry weather in Texas have reduced beef supplies at a time when the demand sector has softened, said Ron Gill, Texas A&M University''s associate department head of animal science.
Cattle feeders are not producing an overabundance of supply, but the industry still has an export market that is underpinning cattle prices, said Gill. The current economic/demand predicament may not be overly detrimental to the beef sector long term, he said, but fine-tuning production practices and cost control are required.
Gill and others suspect that feedlots that are debt- ridden and saddled with huge profit losses are being put up for sale. That, he said, could further constrict cattle supplies that the industry''s current infrastructure may not be able to maintain.
Several underlying issues, including the stock market and its impact on demand, are influencing cattle markets at this time, said Gill. The industry has always relied on fundamental market indicators such as the price of grain and other input costs that are not currently dictating cattle prices.
"Until that sorts out, if it does again, it will be difficult to see where our cattle inventory will relate to the markets at that time," said Gill. "I don''t have an idea when that might shake out, and it might be a year and a half or two years before we have any good ideas."
