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By Staff | Jul 31, 2009

U.S. households have lost $11.8 trillion in net worth since mid-2007 and the average work week has now fallen to just 33 hours for U.S. consumers.

That’s a 20 percent cut in income from a full 40-hour work week. That statistic is frankly worse than the unemployment rate that will surpass 10 percent soon. Just a few years ago, American workers were fully employed, they were spending every dime that they made, they were borrowing equity from their homes to spend more, and there was even a negative savings rate as consumers spent what little they had saved.

George W. was cheering them all on and taxing them far s than the government was spending. History will look back on that period as one of the most gluttonous economic periods in the history of mankind – and the “fiscal conservatives” were in charge in Washington.

George W. was not going to lose out on a second term because “of the economy stupid” like his dad did, so he kept the accelerator floored until the engine blew.

That second term may have been the most expensive in U.S. history. Now the Democrats come in with their agenda requiring them to tax the rich to pay for it until there are none, which will cannibalize more taxpayer assets reducing the collateral available for investment.

This economic downturn will not be short or shallow. It will feel permanent to a lot of people before the growth trend rises again.

Today, consumers have reduced consumption significantly below 100 percent. They are reducing debt, reducing disposable spending, not adding to consumption by accumulating debt. The most recent savings rate was 7 percent and the government is coming after anyone with any money with higher taxes.

The U.S. consumption bubble has burst and the fallout will be protracted. The beef industry is directly impacted by the reduction in consumer spending.

The period earlier this year when we saw the choice beef cutout decline below the select grade beef cutout will be repeated more often. The U.S. imports low grade beef, exporting high end cuts – imports are up, exports down. Japan, our best beef customer, is in worse economic condition than we are in. Its economy contracted for a quarter at a faster rate than the Soviet Union collapsed.

Beef access is no longer as large a trade barrier to expanding beef sales in Japan as is the Japanese consumer’s ability to pay for U.S. beef.

Economist, Bill Helming, told Beef magazine that he sees a “hamburger society” developing, which is one where fewer consumers can afford steak, too few to support a feedlot industry the size of which exists today.

If consumer meat demand is price driven, which it is, when consumers are strapped for cash, McDonald’s dollar menu proved to be the market hit, supporting McDonalds income and earnings. High-end steak restaurant chains are being left deserted and efforts to bring customers in the door with discounts fail in two ways. One, they don’t bring that many more customers in the door and , two, restaurants don’t make any money discounting menu items.

Pork loin has been featured at prices cheaper in the meat case than hamburger, while steak is priced out of demand. Those buying steak are not doing so on the basis of any economic value.

It’s taste preference that sells steak. There will still be steak lovers who can afford to splurge, but not as many as there used to be.

Helming says that the sea change in beef demand occurring will reshape the cattle industry. He says, “The odds are high that 10 to 15 years from now, the percentage of the total available U.S. calf crop that consists of full-fed steers and heifers on feed will be closer to 55 percent than 70 percent.”

Hamburger demand is now being filled by increased imports, up 25 percent, and by dairy herd cow liquidation occurring, but the latter is short term.

If select beef is worth as much as choice beef, then feedlots cannot go to the expense of keeping cattle on feed so long as to grade choice. When the market will pay as much for a select animal as one that grades choice, its optimum market period is at select.

Helming says that half feds will be left on grass longer followed with shorter feeding periods, more grassland, pasture, hay and roughage will be turned into beef, more DDG and less corn fed to cattle.

While feedlot numbers have fallen 5 percent, they may never need to go back to 100 percent.

It’s questionable that we have demand for 95 percent as many cattle on feed for a full feeding term. I don’t think that fed cattle prices can be sustained above $90 for any length of time.

Beef packers are now losing money again, feedlot marketing activity will slow, and rising weights will negate the impact of reduced numbers on feed.

Brazilian family-owned JBS Swift is now the nation’s largest beef packer. They expect that the U.S. market will open to more imported low-grade beef to fill demand from a hamburger society and will be doing all it can in Washington to meet U.S. standards to remove the barriers in place resulting from foot and mouth disease in Brazil.

Economic conditions resulting from the drastic change in the consumer’s ability to spend will leave a lasting mark on the beef industry that is going to hurt feedlots.

A lot of bunks need to get buried as the supply of choice beef is brought down into line with the demand from a hamburger society.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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