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Published January 28, 2013, 10:09 AM

Economist: Beef market is volatile

"But we need to planning already."

By: Mikkel Pates, Agweek

WATERTOWN, S.D. — Economist Jim Robb says there are a “lot of moving parts” in the current beef market, and that a good corn crop and some drought relief could change things drastically.

Robb is director of the Livestock Marketing Information Center in Denver. The LMIC is a cooperative effort between state university extension specialists in 29 states, federal economists and industry cooperators. He spoke recently at the Northern States Beef Conference in Watertown, S.D.

“We’re in a very important year,” Robb says. “We’ve got drought, we’ve got forage issues. We’ve got (good) potential for this next corn crop. The overall U.S. economy will be a driving factor in how high we can take cattle prices over 2013.”

A 3 percent annual increase in the nation’s gross domestic product growth would be positive for the livestock sector, Robb says. If it’s much below 2 percent, consumers will retrench, and so will the beef industry.

“We’re asking consumers to pay record prices for beef already,” Robb says. “We haven’t gotten to the point where the impact of the drought in the last two years — 2011 and 2012 — is even largely reflected in the beef prices because of the multi-year nature of our production system.”

How the economy grows, and what consumers will do in that environment is critical. “Will they continue to buy beef or will they start to switch a little bit to pork and chicken in the domestic economy?”

Deep in the red?

The feedlot side of the cattle market continues to be “deep in the red ink,” Robb says. “It’s a very difficult business. They have sort of financed the cow-calf business in the sense of being willing to take risk and then lose money.”

The packing business struggles, with a recent announcement of another U.S. beef plant shutdown. “It’s hard to pass along these meat costs to the consumer,” Robb says. “That takes the cattle sector really in limbo. We probably have to get feed costs going down to really help heal the U.S. cattle feeding sector, and we have too much capacity.”

The headwind is a lack of profitability in the U.S. packing and cattle feeding sector. “That can change this year, and change dramatically this year, if we get even something better than last year in pasture and range and corn crop,” Robb says. The U.S. corn exports are sinking below 1 billion bushels for the first time in “relevant history,” he says. Ethanol production is pulling back.

“We’re talking in January 2013 and we’re not even close to planting a corn crop, but we can get into a situation where 2013 — no matter how it shapes up — will be a critical year, a year in which management pays off very well.”

Robb is an economist, so he says he doesn’t “get to be optimistic” about the 2013 corn crop.

“In terms of the acreage, it could be similar to last year,” he says. “Certainly the economic incentives are still for farmers to plant a lot of acres. This is not the drought of the 1980s where we worried whether farmers in the Midwest would have enough capital to plant a crop after a major drought year.”

They’ll plant corn

Farmers have crop insurance through 2013. It will be important to watch how much and when the crop is planted, and that could be a big factor in beef profitability.

“By the Fourth of July, the tale will be largely told in terms of our pasture and range, and our corn conditions. This year, we’d have an average price received at $7 a bushel across the U.S. If we do get a large crop, that could easily drop to $5 a bushel or lower next year,” he says. “That would be a dramatic change for the crop sector of the U.S. and a dramatic change for the livestock sector.”

Right now, the LMIC is forecasting that $5 corn will be a turning point for the livestock sector.

“If we get a big enough crop — 100 million acres planted, which is what people are talking about, that seems large — and an average corn yield, we’ll have below $5 a bushel in the next crop year 2013 - 2014,” he says. “If we get something on the lower end toward this year, we have the real chance to take corn, for a short term, to $10 a bushel. That’s a $5-a-bushel swing.”

The stage is set for either a year of healing for the livestock industry, or one where the U.S. livestock industry across the board has to make another severe round of adjustments. “We can’t know, but we need to be planning already,” Robb says.