Can smaller meat supplies support record livestock prices?

Can smaller meat supplies support record livestock prices?

One variable about 1989 U.S. meat markets is certain: Total red meat and poultry supplies will be down somewhere between 1% and 3% from a year ago. But, beyond that, the 1989 price outlook for cattle and hogs is fuzzy and hotly

Total U.S. meat consumption hit a new all-time high of 220 lb. per capita in 1988 and has been rising an average of 1 lb. per year since 1973. But analysts are beginning to worry now that a further increase in total meat consumption may be difficult to attain, even though promotional dollars from producers appear to be helping red meat demand.

The year-to-year decline in total meat supplies will mark only the second such occurrence this decade and is a major supportive factor in the bulls' arguments for new record cattle prices this spring and a rebound in hog prices the second half of the year.

Most cattle bulls also hang their hats on the smallest cattle inventory since 1962. The number of mother cows may hold steady, indicating no significant increase in feeder cattle is likely until 1991.

Hog traders note that a 2% decline in the hog breeding herd and an increase in farrowing intentions means some gilts will need to come out of the slaughter mix. Some economists expect a decline in marketings beginning as early as April as the smaller fall pig crop hits the market.

Warm weather early this year could be a potential negative for hog and cattle prices. The unusually warm weather will improve weight gains and limit death losses. Marketing fat livestock will restrict rallies, sources warn about overfeeding.

The 1988 drought played an important role in keeping livestock expansion in check. While history says back-to-back droughts have never happened in the Corn Belt, pasture conditions have been hurt by poor weather in consecutive years, notes Tom Morgan, president of Sterling Research Corp. in Arlington Heights, Ill. If the Northern Plains does not receive moisture-replenishing precipitation before March, then feeder cattle could find fewer buyers this season, especially at current high breakeven costs, Morgan warns.

Poultry's effect

Poultry prices are likely to be steady to weak with expected increased production. Softer poultry prices will further widen the spread to retail beef and pork prices. How consumers react to higher retail prices is always very difficult to predict, analysts warn.

But Ernie Davis, livestock economist at Texas A&M University, says the wide spread between beef and poultry prices will not be as great a negative influence. Record high retail beef prices have already run off price-conscious buyers, and all that's left are hard-core beef buyers.

The record-long U.S. economic expansion makes some analysts very nervous about higher prices if a recession materializes this year.

But Mike Sands, project leader for the Western Livestock Marketing Project in Denver, says the advent of an economic downturn could actually stimulate red meat demand as families shy away from big-ticket purchases such as cars, televisions and furniture and go out to eat instead.

Technical trader and independent broker Gary Ott in Grand Rapids, N.D., says the inability of the cattle market to rally earlier this year and the fact the cycle high is due before the end of April suggest the cattle market may once again top in a year ending in 9. Ott looks for prices to trend lower into a fall low that could mark the 3 3/4-year cycle low. Cattle price action is similar to what unfolded in 1981 and 1985, he says.

Glen Ring, editor of Commodity Closeup in Cedar Falls, Iowa, says the December high in the hog market looks like the midpoint of the 5 1/2-year cycle that would project a downtrend in prices into late 1990 or early 1991.

Jens Knudson, economist at the American Meat Institute (AMI), says the demographics of the American population and improved nutrition education will keep red meat demand in an uptrend into the 1990s, especially with more exports.

During the slump in beef and pork demand in the 1970s, the profile of the average consumer was negative for meat consumption, Knudson notes. Studies show young, single adults tend to spend less on meat than married adults. Now that the baby boom generation is producing its own baby boomlet and staying home, these same people are buying more hams, tenderloins and pot roasts.

Consumers also are more sophisticated about nutrition issues. The increased producer educational campaigns and a realization in the nutrition field that meat fits into a well-balanced diet are producing better demand results, Knudson argues.

While the image of red meat has improved, some potential problems remain on the horizon.

The aging of the U.S. population is a potential negative for beef consumption if the industry doesn't improve its marketing of smaller portions, says Laurian Unnevehr, extension economist at the University of Illinois. Studies show beef consumption declines among people older than 65 while pork and chicken consumption remains steady.

According to a study co-authored by Unnevehr, the shift away from beef to chicken was not so much a function of health issues but, instead, a signal that consumers preferred easier-to-prepare processed chicken items.

Increasing family and job time constraints keep convenience an important factor in consumption trends.

But AMI's Knudson says the idea of convenience needs to be a broader concept. He says the fast food service outlet remains very positive for beef and is improving for pork. Finger foods for beef and pork, such as chicken "nuggets," are in product development and are reaching the grocery stores quickly. But the real convenience of food is value, Knudson says.

"People want to be happy with a meal and don't want any waste," he states, noting consumer values are based on the perceived benefits of the product and its price.

The push for closer fat trim on beef and pork cuts continues to impress consumers and promotes a more healthful image of the meat industry.

Fat skews statistics

Larry Dewer, USDA meat analyst, says the decrease in pork and beef consumption is not as great as many believe because packers and retailers are trimming more fat and selling more boneless beef and pork cuts. This movement to trim more fat and sell more boneless red meat helps explain why retail consumption has been reduced on a per capita basis.

Knudson acknowledges that the chicken industry long ago realized the need to use the whole carcass. The beef and pork industries slowly are finding the "back door" of the packing plant can be a profit center.

The improved use of the entire beef and pork carcass helps keep the profit margins up and ultimately cash hog and cattle prices stronger. For this reason, it's important to watch the hide, offal, tallow and variety meat trade closely for any potential price changes in cash hogs and cattle, analysts say.

Davis says the European Economic Community's ban on U.S. meat imports because of hormone use could become a negative factor for U.S. sales. Quick resolution of the issue is unlikely. It could develop negative press despite the lack of concrete human side effects. The European ban primarily will hurt variety meat exports to Europe and packer profits.

Davis warns that the food safety issue could become the same sort of negative influence for the livestock industry in the 1990s that the nutrition issue was in the 1980s.

The precedent-setting beef and citrus trade liberalization moves in Japan offer the beef trade an important marketing opportunity because U.S. beef is of a higher quality than beef from Australia and New Zealand, notes John Francis at the National Livestock and Meat Board.

All Japanese tariffs on beef expire in 1991. Meanwhile, exports could expand by a multiple of five, adding more than $1 billion a year to the U.S. beef industry. Francis says the entire Pacific Rim offers a great opportunity for future pork and beef exports.