WHILE the current global economic recession is placing unusual distortions on beef price and demand in the US at present, agriculture generally is weathering the economic storm surprisingly well.
This is the view of respected US commodity analyst, Dan Basse, who spoke to a Rabobank breakfast audience during Beef 2009.
Mr Basse heads AgResource Co, a Chicago agricultural advisory/research firm which forecasts domestic and world agricultural price trends.
He says the world has lost US$47 trillion worth of wealth in the current crisis – the largest loss of wealth in history, compared with a $3.4 trillion loss in the Great Depression.
A special 72-page report from Beef 2009 is included in today's Queensland Country Life.
"But we in agriculture have been buffered, to some degree, by ongoing demand for food products that has been somewhat higher than expected," he says.
US beef producers, however, are suffering right now, and Australian producers hold a considerable comparative advantage, in being able to feed and finish animals on forage and grass.
The US has virtually lost its ability to grass finish large numbers of cattle due to alternative land use.
US feedlots now paid $US4.50/bushel for corn, or higher, and it takes 57 bushels to finish a beast to marketable weight.
In 2006 the Bush administration decided to embrace the biofuels policy, and this inflated price of corn, driven by ethanol production, that has impacted on US feedlots.
"Our US cattle industry has now lost $3 billion directly or indirectly in the last three years as a result.
"Forty percent of feedlots in the US are currently up for sale," Mr Basse says.
"Last year, the average US cattleman lost $119 per head - the largest loss in record – and this year the forecast is a loss of $107 a head.
"That's the main reason the US cow herd is now at its lowest level since 1954."
As a result, some "strange things" are happening in terms of price and demand for beef in the US, Mr Basse says.
Last week, the price of USDA Select grade beef (second lowest of four US quality grades) was more expensive than USDA Choice, and only $1 below the elite grade, USDA Prime.
"We have never seen Select beef under such heavy demand from consumers," he says.
"What is going on? Quite simply, as the American economy stagnates, one of the things consumers cut back on is going to restaurants.
"Housewives stay home, and trade down - hamburger becomes a much stronger meal choice. For the moment consumers want Select lean, carrying just 15-18pc fat.
"So those prices have rallied as people have stayed home."
Currently, USDA Select beef was is $3.95/lb. Tenderloin is currently selling for $5.95/lb, where a year ago it was worth $19.95, he says.
"Nobody currently wants the middle meats – ribs, tenderloins - and the items that the restaurant trade would normally seek.
"We can’t keep up with the demand for lower cuts of hamburger beef."
Mr Basse says analysts are not sure when this trend would start to turn around, but for the moment, the spread between Choice and Select is at an historic low.
Another phenomenon was the continued liquidation of US herds.
"This is the first year since 1973 that US farmers have not only reduced their beef cow herd.
"But the same trend is happening in poultry, down 6pc, and pork production, down 5-10pc.
"And that is not only happening in the US, but globally."
For cattle producers, if and when stability starts to emerge on the world landscape – and there is a return to middle cuts – cash cattle prices will probably rally by 15-18pc, Mr Basse says.
"We've already seen cash cattle and beef demand start to go up in the US, but it is not yet to a degree where I am comfortable in saying, this is the turn.
"But assuming that the stock market is a lead indicator of our economic welfare going forward, we believe that the liquidation phase in the supply side of the meat protein chain will cause beef and livestock prices to improve as we move towards the fourth quarter this year (starting October), and beyond.
"There is optimism beyond the next two quarters."
For Australia, as US beef prices go higher, one of the implications is that Australian exports in markets like Japan and Korea become more competitive, as well as exports to the US.
Most currently, the detection of Swine flu would see 5-10pc of US pig producers go out of business, and could deliver a 3-4pc increase in beef demand over the next two quarters, giving a $1-$2/hundredweight increase in beef price.
Much of the beef producer’s ability to ride-out the current uncertainty and unexpected events around the global economy will hinge on their ability to manage risk and manage costs, Mr Basse says.
"However, I am very optimistic about agriculture longer term.
"Now, with disposable incomes rising in countries like China and India, we’re seeing everybody start to level off in terms of their disposable income, and nowhere else in the world provides the variety and quality of beef as Australia does.
"Chinese incomes have quadrupled to $2900 a year.
"While neither the US or Australia has been able to get large quantities of beef into China to this point, apart from some restaurant trade, the first country that is successful in doing so will have a strategic advantage."
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