By SARAH B. AUBREY
Indiana Correspondent

WEST LAFAYETTE, Ind. — In its most simple equation, supply equals demand when it comes to commodity prices such as beef. While the beef market rode the recession down, some economists are now predicting that prices will achieve noticeable gains as soon as winter 2010.

Supply of fed cattle has been declining for nearly two years, with 2010 supply expected to be down another half percent, according to Purdue University Economist Chris Hurt. That continued decline of finished cattle coupled with a host of economic factors converging around the same time, leaves Hurt cautiously optimistic.

“We look at two primary factors, supply of beef in the marketplace and the demand for it. We make an effort to quantify those factors; the easiest is the number of head inventory and weight breakdowns to see how total production and how quickly they will come to market,” Hurt explained.

Hurt said one of the major indicators potentially driving a price improvement are the export markets. “USDA expects beef exports to be up 7 percent in 2010. This improvement comes from recovery and increased incomes around the world and the world economic recovery.”

While many Americans and agricultural producers probably don’t yet feel the recovery, Hurt said data in some aspects of the economy will be there to support it. “Both U.S. and world economic indicators are improving, there is just a lag in getting that information reported,” Hurt noted.

By fourth quarter this year Hurt said beef prices should be approaching the high $80’s per cwt. and by early 2010, he hopes to see upwards of $92 per cwt. on fed cattle.

He anticipates even prices in the high $90s by mid next year.
“Beef sales are very highly related to income. When incomes are higher, people eat more beef,” Hurt said.

Recovery in world economies such as Korea, Japan and Canada, along with the weak U.S. dollar means stimulus to the U.S. beef market.

“The weak dollar also makes imports expensive, and we won’t be bringing as much beef into the U.S.,” Hurt said. Besides exports, population growth, which Hurt looks at in terms of per capita supply, is another factor that points toward beef prices edging up for 2010.
“Per capita availability of beef was down 1.5 percent in 2009,” he explained.

This reduction is due to decreased inventories as producers retained fewer replacements and shed cow numbers as prices slid.
Prices have already started moving in a positive direction, though Hurt said it is not enough of an increase to get producers back to profitability. Seasonality will hopefully play a role in moving prices higher this winter as historically cattle peak out in late winter and early spring.

Hurt cautions the near-term recovery is likely, but not imminent. Potential impacts could include the reduction of some 87,000 dairy cows as dairy producers hope to stabilize their demoralized market.

“Dairy cow herd reduction will have impact, especially in the hamburger, stew meat and low quality steaks,” Hurt pointed out. Still, he thinks the thinning of the beef herd in recent years has been enough to offset the additional meat in the marketplace.
Another factor in beef price is the grain markets. “Much still depends of what happens with the grain prices, based on this weather and the late harvest. That will have an effect on the Eastern Corn Belt,” Hurt said.

Speaking of the eastern half of the United States, Hurt indicated that prices could lag some compared to the bigger cow/calf and feedlot regions of the American West where prices are regionally a bit higher than east of the Mississippi. Profitability for Eastern Corn Belt producers is mostly driven by fed cattle prices indirectly and for most producers it is based on feeder calf prices.

“Here we sell more of our calves for backgrounding programs, for example,” Hurt said.

Profitability has been in decline 2008, after a high of around $120 per cwt. in fall 2007, Hurt reported. “That number is fairly close to profit,” Hurt explained, saying that the prices since averaging around $105 in fall 2008 and upwards of $110 expected in 2009, have been below a cash flow level, all input costs considered. Hurt hopes to see the feeder market back to $120 by late spring, but doesn’t believe that number is high enough yet to entice new producers into the industry or encourage adding numbers back, just yet. “I can’t say that is enough to say anyone is making a lot of money or that is would encourage someone to expand back into the beef business.”

As for producers looking to stay in the business improve cash flow, it is the time to stay the course. “The theme ride the recovery really is true, because the beef market had to ride the recession down,” Hurt said. “We’ve probably begun to make that turn to recovery.”