Cattle prices have fallen, despite a smaller beef supply, because of weakened demand, but higher cattle prices are expected in 2010 and 2011.

SAC CITY – While U.S. cattle and hog producers have faced profitability challenges for a number of months, analysts expect breakeven prices by mid 2010 in the hog market, and beef demand is projected to recover slowly with the economy.

The news is even more optimistic for livestock producers in Iowa, due to the state’s comparative advantages.

“We will return to profitability, and I believe the address of the last cattle producer and last hog producer standing will likely be Iowa,” said John Lawrence, an Iowa State University Extension livestock economist. “The pendulum is swinging back to Midwestern livestock operations, because we don’t have the transportation costs that other regions do, we have a ready supply of nutrients in the form of livestock manure, and higher energy prices favor integrated crop and livestock operations near processing infrastructure.”

For pork producers, who have struggled with losses since October 2007, break-even prices are expected by April or May of 2010, said Lawrence, who noted that although the U.S. breeding herd is decreasing slowly, production efficiencies have offset some of the decline.

Industry downsizing, however, is idling some facilities. The North Carolina-based Coharie Hog Farm declared bankruptcy in mid-November and the company is expected to liquidate 30,000 sows. “We are beginning to hit the wall and I expect to see more bankruptcies in the near future,” Lawrence said.

Mandatory country of origin labeling, which has dramatically decreased the number of live hog imports from Canada, is also having an impact on the hog market. Canada and Mexico want an official World Trade Organization inquiry into the fairness of new U.S. country-of-origin labeling requirements for meat products.

“They are saying that whether the U.S. intended it or not, COOL has caused trade hardships for them,” Lawrence said. “Keep an eye on this, because it’s not clear how this will turn out.”

International trade does offer a bright spot for pork producers in terms of exports, which are expected to be stronger in 2010 and beyond, Lawrence added. U.S. pork has already marked strong performance in Mexico and Japan through the first three quarters of 2009, and the positive momentum continues to build.

Mexico’s September 2009 volume surpassed September 2008 by nearly 37 percent, putting Mexico’s January-September export volume at 369,376 metric tons (814.3 million pounds) valued at $547.7 million. That’s an increase of 38 percent and 15 percent, respectively, over the first three quarters of 2008, according to the U.S. Meat Export Federation (USMEF).

In Asia, the value of exports of U.S. Pork to Japan increased by 3 percent to $1.17 billion. With a strong fourth-quarter performance, pork exports to Japan could surpass last year’s record value of $1.55 billion, noted USMEF.

Beef demand continues to lag

In the cattle sector, weak demand continues to plague the industry. In fact, 2008 was the worst cattle feeding year in history, Lawrence said, and 2009 is shaping up to be the second worst.

Depressed prices in the beef industry are closely linked to the down economy, since consumers’ spending on food has declined. From 1999 to 2008, domestic spending on food grew 5.1 percent a year, but by the second quarter of 2009, this dropped to -0.3 percent. As a result, cattle prices have fallen, despite a smaller beef supply, because of weakened demand.

Lawrence noted that the last cattle cycle lasted 14 years, with nine years of liquidation, followed by two years of expansion, and now a move back into liquidation. Although Lawrence thinks U.S. producers will continue to liquidate the beef cow herd into 2012 and maybe beyond, now might be the time to retain heifers.

“Recently we’ve seen the lowest calf crop since 1950,” Larence explained, “so it can make sense to get in position for higher calf prices, although it takes equity and cash to do this.”

Due to the strong relationship between consumer spending and beef demand, Lawrence expects “tough sledding” for cattle producers until the economy turns around. He points to trends in competing meats like poultry, where chicken producers have cut back and haven’t started to rebuild yet.

While beef demand may recover slowly, continuing tight supplies will eventually make an impact.

“All else being equal, I expect higher cattle prices in 2010 and 2011,” Lawrence said.

Contact Darcy Dougherty Maulsby by e-mail at yettergirl@yahoo.com.