farmgate: Will 2009 Bring Profitability To The Livestock Producer?
The supply of meat in the grocery store is being trimmed, a fundamental long sought by the livestock industry because of the potential for a return to profitability. The declines are being seen in the beef, pork, and poultry sections of the meat counter. But with the consumer cutting back on expenditures, how will the livestock producer be affected?
The “big picture” indicates that supplies of meat are beginning to be less than the same month a year earlier. This year over year reduction will remain throughout 2009, says Iowa State livestock economist John Lawrence in the December issue of the Iowa Farm Outlook. But Lawrence says the profitability for a livestock producer will not only be the result of the meat supply, but also domestic consumer demand and whether the stronger dollar will drive off foreign customers.
Poultry is 40% of US meat production, and Lawrence says production at all points of measurement is less than the prior reporting period. What began with a 6.3% increase in chicken production at the first of the year compared to 2007 has faded to a point 4.2% lower than late in 2007. Turkey is on a similar trend. And USDA’s forecast is for a 3-4% decline in 2009 production compared to 2008. High feed costs hit hard at poultry producers and Pilgrim’s Pride is on the verge of bankruptcy as a result. But the higher value of the dollar has hurt export business and Russia, which took 32% of US poultry exports last year plans to reduce its purchase, in part because of the exchange rate.
Pork production was supposed to remain above 2007 production through the end of 2008, but it slipped below comparable months beginning in October. Lawrence says the early decline in production started the trend that should continue through the fall of 2009. A decline in hogs from Canada has also benefited the US market, but instead of the stronger dollar pulling in more hogs, Lawrence attributes the reduction to Mandatory Country of Origin Labeling (MCOOL). He says Morrell and Farmland will buy only US hogs, and discount prices will likely be offered for Canadian hogs which may reduce the imports. Lawrence says there may be some pricing variations because of MCOOL, “It is important to recognize that unless MCOOL results in lower total supplies or increased demand, prices are not likely to change in the long run. In the short run price differences will probably exist as packers acquire the hogs they want.” However, exported hogs and pork are 66% more than 2007, despite the stronger dollar and weaker global demand. Lawrence believes hog prices have seen their seasonal low, and should increase 25% by June, with current hedging opportunities that should be profitable. Hog futures and lower feed prices point to profitability from April to December 2009.
Increased cow slaughter points to lower beef production in the future, with current steer and heifer slaughter equal to 2007 rates. In fact, beef cow slaughter is 21% higher than last year, meaning a smaller calf crop and fewer head for slaughter in 2009 and 2010. Beef supplies should decline for the first six months of 2009, which Lawrence says means higher prices. The number of cattle on feed has been lower than 2007 since mid-year. In addition to higher feed prices, pasture rental rates have doubled since 2003 and hay prices are substantially higher, all of which reduce profitability. Lawrence says demand is a concern because the recession has curtailed restaurant traffic and demand for food service products. The stronger value of the dollar means beef exports to South Korea and Mexico will decline and beef imports will increase.
John Lawrence expects lower livestock production to support prices in 2009, with cattle and hog prices averaging higher in the coming year than in 2008. However, the economy will dampen demand for higher value cuts of meat and the strength of the dollar will dampen export demand for meats. He says a reduction of exports could shift more meat to the domestic market, increasing the supply and lowering prices.
Summary:
The livestock industry, which has recorded financial losses due to high production costs and abundant supplies, has begun to reduce beef, pork, and poultry production. Herd liquidation across the livestock sector is expected to help producers return to profitability during 2009. Lower feed prices will help most producers, but record exports may soften as a result of the stronger dollar.
Posted by Stu Ellis on December 8, 2008 12:00 AM to farmgate