The financial fortunes of the US red meat industry in 2013 rest with consumers. Beef and pork companies can only hope that Americans and consumers in other countries continue to open their wallets as US red-meat prices will be higher than last year.

As the most expensive protein, beef will be most vulnerable to consumer resistance to higher prices. The beef complex faces significant challenges on the supply side as well. An historic decline in US cattle numbers has left the national herd at its smallest level in 61 years. Processors of both fed and non-fed cattle face reduced cattle numbers this year.

This will force them to get more efficient and creative to operate their plants at an economic level. But contrary to some expectations, it is unlikely that a large fed-beef processing plant will close. The four largest processors are well positioned financially to ride out what might be two years of shrinking cattle numbers, and they have invested too much in existing plants to close one any time soon.

The beef industry appears to be in constant crisis mode. From the battle against E. coli O157:H7 starting in 1993 to the first bovine spongiform encephalopathy case in the US in 2003, the industry has faced severe animal-health issues. It’s had to adjust to costly new government regulations and endure media attacks that nearly eliminated the production of lean finely textured beef, a legitimate beef product, last year.

Then in early December came a three-part series about the industry by the Kansas City Star. It used the pejorative term “Big Beef” to attack the industry over everything from tenderizing beef to antibiotic use to nutrition claims. What most alarmed industry officials was that packers gave reporters unprecedented access to their plants in an attempt to show how they operate. One fear is that the Star’s negative stories will cause packers to return to a “siege” mentality when it comes to the media.

More with less

The industry has a real challenge to deal with: shrinking cattle numbers. The 2010-2011 Texas-Oklahoma-centered drought and last year’s more widespread drought impacted cow-calf producers’ ability to expand their herds. The national herd on Jan. 1 will likely total 89.1 million head, its smallest number since 1952’s 88.072 million head. It’s startling to realize that the US has lost 14.5 million cattle since 1996.

Yet, the herd might continue to shrink until 2015. As of early December, more than 62 percent of the continental US was still experiencing moderate to exceptional drought. That compared to just over 29 percent a year earlier. The drought has worsened since last September and forecasts are for it to continue into 2013. Cattle numbers might continue to decline this year if producers are forced to cull more of their herds and sell young heifers rather than retain them for herd rebuilding. The latter might not begin until next year, which would mean even tighter numbers for feeding and harvesting. A growth in beef herd numbers might not show up until 2016, analysts say.

This prospect has significant consequences for all involved in the beef chain, from producers to processors to companies that supply products to the industry. The deepest impact though will be on consumers. A shrinking supply of domestically produced beef will force retail and foodservice prices higher and will likely force end users to be more dependent on imported beef.

USDA’s latest forecasts are for available beef supplies (production plus imports minus exports) in 2013 to be 54.9 lbs. per person, down 2.6 lbs. from 2012. Per capita supplies of pork and chicken will also be down this year from last, by 1 lb. and 1.3 lbs., respectively, according to USDA. Americans will continue to eat more pork and chicken relative to beef.

Doubt from drought

The impact of the drought caught the national media’s attention last summer and stories zeroed in on food prices. But the drought’s impact isn’t likely to fully hit consumers until this year. The drought will raise the year’s grocery bill for a family of four by $351.12, according to projections by The Food Institute. That’s an increase of about $6.75 per week. Higher grocery bills will be most notable in the meat section where a family of four can expect to pay $44 more in 2013 than this year, says the institute. USDA forecasts that the retail price of beef will be 5 percent higher this year than last.

Such price advances might seem modest. But they must be put in the context of many Americans’ struggle to pay more for beef as the US economy remains weak and unemployment remains high, say economists. This struggle began in 2008 at the height of the recession and its effects on the beef industry remain to this day.

More than half of all beef is consumed in some ground form, as that is the only affordable beef item for many Americans. This trend will continue. Both wholesale and retail beef prices were at record levels most of last year and beef became less competitive with pork and chicken. This showed up in grocery store sales and is likely to be the trend in 2013, analysts say.

The beef industry has adjusted to the loss of millions of cattle, notably by improving productivity per animal, better red meat yields and record heavy carcass weights for steers and heifers. Steer carcasses averaged 858 lbs. in 2012 vs. 841 lbs. in 2011, while heifers averaged 792 lbs. vs. 773 lbs., says Jim Robb, director of the Livestock Marketing Information Center. He doubts that carcasses will get heavier again in 2013 and has both categories down slightly. Overall carcass weights though will increase by 3 lbs. to 789 lbs. from 786 lbs. in 2012 because of fewer cows in the slaughter mix, he says.

More beef from fewer animals won’t compensate for fewer head to be fed or harvested. This will exacerbate the 35 percent over-capacity in the cattle-feeding industry and the 10 percent over-capacity in beef processing. This author calculates that industry-wide processing capacity is just under 140,000 head per day. The industry the first 49 weeks of last year slaughtered just over 125,000 head per week, with slaughter in the period down 1.180 million head or 3.7 percent on the same period the year before.

A further decline in slaughter will occur in 2013. Federally inspected steer and heifer slaughter might total 24.850 million head, down 2.4 percent from 2012’s 25.459 million head, Robb says. Cow slaughter might decline to 5.6 million head from 6.4 million head in 2012. Robb forecasts total commercial slaughter for 2013 at 31.445 million head, down 4.4 percent from 2012’s 32.974 million head. Beef production in 2013 might decline to 24.8 billion lbs. from 25.9 billion lbs. in 2012. This will be the smallest production since 2005, he says.

The decline in cattle numbers means beef processors will again have to pay more for slaughter cattle. USDA and industry analysts forecast that fed steer and heifer prices will average around $129 per cwt., up from 2012’s $122.85. A forecast of a 20 percent increase in prices came in late November from JBS SA CEO Wesley Batista. Such a leap occurred between 2010 and 2011 but analysts say a 20 percent increase this year is unrealistic.

That’s because fed-beef processors will struggle to pass on even a 5 percent increase in fed-cattle prices, analysts say. The blended Choice-Select cutout likely averaged $187 per cwt in 2012, up 5 percent from 2011. Early December live cattle futures prices implied the blended cutout in 2013 would have to average $199, up 6.4 percent from 2012. This would mean the retail All Beef price would have to average more than $5 per pound.

Consumers would thus turn to pork and chicken. USDA currently has 2013 pork production down 4 percent from 2012 at 22.775 billion lbs., and broiler production down 1.3 percent at 36.445 billion lbs.

Analysts though believe USDA’s pork number is too low. Ron Plain, Univ. of Missouri, has 2013 production down only 1 percent. He forecasts 2013 commercial hog slaughter down 0.4 percent at 112.700 million head vs. 113.200 million in 2012. The production number is lower because hog carcass weights will be below year-ago levels, he says.

Overall hog numbers declined only slightly in 2012 and might even show a slight increase if feed costs decline in 2013, Plain says. He has productivity (pigs per litter) up again. The long-term average increase is 0.7 percent per year, he says. Hog producers late last year were contemplating herd expansion as they looked at the decline in competing meats and higher live-hog futures prices. Expansion might also occur if timely rains look like producing larger corn and soybean crops in 2013 than in 2012, he says.

Pork processors thus will have more adequate livestock numbers available to them in 2013 than beef processors. Retail pork prices might be somewhat higher than in 2012. But they won’t be up as much as beef prices. Those prices will remain historically high relative to competing meats, and will test even more consumers’ ability or willingness to pay more for their beef “fix”.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).