Daily Livestock Report

Vol. 8, No. 146 / July 29, 2010

Market Comments

In yesterday’s letter we noted some of the recent drivers

in the grain markets (acres, weather, drought in Russia)

which underpin a somewhat more bullish view for feed prices

going into the fall. Higher feed prices could temper the incentives

for expansion among hog and pork producers. As for beef

producers, the situation continues to remain challenging and

higher feed costs further complicate critical decisions regarding

the future of the industry. The National Cattlemen’s Beef Association

is currently convening in Denver CO and we’ll keep

you posted as to how the largest beef association in the country

sees the outlook for the future.

While the supply picture has become somewhat more

bullish for grains and livestock, it is also important to keep an

eye on demand. Exports have been a critical demand driver for

the market to this point but a recovery in domestic markets is

necessary for a sustained growth of the US livestock and poultry

industry. A number of factors drive protein demand, among

them consumer incomes and spending patterns; employment

(which is tied to spending but also labor availability at home for

food preparation), price of competing proteins, health news and

information; consumer perception of risks in consuming protein

items; and in urban areas the consumer understanding/

misunderstanding of the modern food production systems.

The charts to the right illustrate only two of the points outlined

above. Consumer confidence has rebounded from the lows set in

early 2009 but it has leveled off in recent months. The consumer

confidence index in July was down 12 points from May levels

and at 50.4 it is now at the lowest point since February. We

would like to see the confidence index above the 60 level (see

chart) before proclaiming a sustained recovery in the broader

market. The decline in consumer confidence sometimes is seen as

proxy for consumer spending, which is a real driver for beef, pork or chicken demand. A study by economists at K-State

(Tonsor, Mintert, Schroeder 2009) indicated that “on average, a 1 percent increase in U.S. consumer total expenditures results

in a 0.9 percent increase in the quantity of beef demanded.” Consumer spending has increased moderately since the beginning

of the year but it will be constrained, in part due to high rates of unemployment. As the map above shows, unemployment rates

remain particularly high in the Southeast and West Coast. Foodservice remains particularly vulnerable to high unemployment

rates. In the short term, the demand picture appears negative for beef, less so for pork and chicken.