External forces

The futures markets took a beating last week. I suppose it’s driven by a great deal of uncertainty in the economy. It is somewhat shocking that a major investment bank, Bear Sterns, could go out of business that fast, but it didn’t take long for Carlyle Capital Corporation to hit the skids as well. But then it’s not when you realize what these investment bankers have been doing—hedge funds, playing the futures, mortgage-backed securities that no one knows the value of and had very little collateral to back them up.

I suppose the upside is that producers with good credit should have the opportunity to reduce the cost of operating capital. The way the Federal Reserve is dropping the interest rate, they should be giving money away soon. I will agree that money is like fertilizer and you have to spread it around if you want things to grow, but this situation is increasingly obtaining the odor of fertilizer too.

However, as far as the markets are concerned, there are still very sound fundamentals leading the beef and cattle industry. This industry has been turned upside down with high, unsustainable feed costs. And, our government’s well-intended, but short-sighted energy policy has placed a great burden on animal agriculture, and the food industry in general. If the feds are intent on going forward with their biofuel mandates, we could be in for a rough ride. When it comes to biofuels, it would seem appropriate to let the ethanol production subsidy and import tariff expire in the next couple years.

Unfortunately, a couple years could be too late for some in the cattle and beef industry. Cattle feeders are now losing several hundred dollars a head. Estimated cattle feeding losses for last year were just over a billion dollars. Over the past five years, cattle feeding has lost investors over $5 billion, according to the Livestock Marketing Information Center. The greatest cattle feeding profits came in 2003 when feeders collectively made $2.9 billion. Remember when some guys were making $500 per head?

The cattle feeding sector has been in a consolidation phase for nearly three years. There are many feedlots for sale in the southern Plains and it appears that this consolidation could change the culture in the panhandle region of Texas and Oklahoma.

Packers aren’t getting along much better. Last week they slipped back into the red ink after a couple weeks of making $20 a head. The sustained losses in the packing industry are horrendous and the amount of debt these guys are carrying is huge. It’s no wonder that Smithfield/Five Rivers Cattle Feeding and National Beef Packers came running to the table when the South American company JBS S.A. inquired about purchasing these three outfits. They all wanted to stop the bleeding.

I’m sure it seems like a broken record at this point, but domestic consumers just aren’t buying beef like they used to. Perhaps the bright spot is that exports are up 25 percent. Of course the export markets are pretty flat, except Canada and Mexico which are purchasing more beef than a year ago. There is also a new kid on the block; Vietnam is now the fourth largest importer of U.S. beef.

As of last week, beef production was down just one tenth of one percent from the same point last year and the industry processed just 40,000 fewer cattle than a year ago. Today we have a $90 fed market, when it was $99.30 last year. The Choice boxed beef cutout was $1.45 last week and a year ago it was $1.66. Feeders still don’t like the price of replacements, but overall, calves are selling fairly well.

The psychology of the economy has become reality and it’s starting to have a very competitive effect on the meat complex. Lots of low priced pork and poultry is forcing consumers to rationalize their meat purchasing. Consumers have shifted their beef consumption to hamburger, our lowest value cut. With one hour of wages, a consumer can buy 10.6 pounds of poultry, 6.1 pounds of pork, or 4.6 pounds of beef.

The next few weeks will be important to our industry. We need to keep an eye on hedge fund activity and beef demand. We’re in a transition period between pot roast and grilling season. But once we get into warmer days, the fire should be stoked and we should be into the high beef consuming months. Retailers will play a big role in moving beef and let’s just hope they decide they can justify featuring more beef specials since the cutout is 20 cents lower than last year. — PETE CROW