Managing and understanding risk will be even more important in 2009
It seems there are few industries, including the cattle industry, that have come out of 2008 untouched by the unraveling of the financial system. Cattle producers watched prices for their animals plummet, while input costs tipped the scale and made profit margins virtually disappear.
"2008 proved to be the most volatile year in recent memory. Rising fuel and energy prices along with record-high feed costs severely impacted profit margins," says Jamie Wilrett, 2008 CattleFax president.
As producers look ahead to 2009, will this year be as volatile? Will grain prices remain elevated in the future? What does this mean for prices and profitability in the years ahead?
One place producers sought those answers was at the annual CattleFax Outlook Seminar held during the 2009 National Cattlemen's Beef Association (NCBA) Convention and Trade Show. As producers from every sector of the beef industry converged on Phoenix, Arizona, this past January, it was clear: Never before has knowledge been more critical to the future of the industry.
According to CattleFax, cattle producers face softer beef demand to kick off 2009. That could change, however, if the financial markets begin to stabilize. Because consumers are making a concerted effort to eat more meals at home, higher-priced meats like the rib and loin have dropped in value. At the same time, the chuck and round are seeing a 2% increase in carcass value compared to a year ago.
Overall cattle supplies are expected to continue to decline in 2009, following a 1.5% dip in 2008. Beef cow numbers have decreased by 600,000 head to 31.9 million. This is due to drought in some areas and decreasing profit margins in others. Slaughter of beef cows is projected to be at liquidation pace in 2009. As a result, the calf crop through 2010 is projected to shrink by 2%.
The small ray of hope is that the decline in cattle inventory means a smaller beef supply, which could bump beef imports to 2.7 billion pounds for 2009. The supply of competing meats is projected to be lower in 2009. This is due, in part, to higher feed costs.
Corn, on average, has increased $2.70 per bushel over the last years.
CattleFax predicts the overall 2009 U.S. price for a bushel of corn will be lower than 2008 ($4.25 vs. $5.30). Production costs for corn are estimated at 30% to 40% more than 2008, which will impact planting decisions. The current crop is forecast at 12.5 billion bushels, and increased production is needed to meet the demands of ethanol.
The era of cheap fuel and grain is over as producers look for ways to offset low market prices to manage risk.
"It's almost unbelievable the range and volatility we've seen over the last several months. In one year, the cattle industry lost 68% of its net worth," says Tom Brink, Five Rivers Cattle Feeding, Loveland, Colorado. "Years ago when the corn price fluctuated 30 cents, it was a big deal. Today we're seeing whole-dollar changes."
Livestock producers need to deeply evaluate where the money goes and quantify the value of each aspect of their business. "Our business has changed. There's never been a time in this business where we have had to scrutinize and analyze the numbers to survive like we do today," says Brink.