Thursday, September 17, 2009

Meat and Dairy Industries Slow to Shrink

It is definitely a global trend. Farmers are overestimating demand and producing too much meat and milk. The oversupply is driving down wholesale prices and wiping out the profits of many of the farmers.

This situation was set up in 2007 when rising energy and grain prices led to increases in prices of animal products. Beef and milk prices went up especially fast because of the large amounts of energy and grain that go into cattle. As retail prices went up, consumers and farmers alike cut back. Farmers were slower to cut back, though, and in 2007 and 2008, many barely broke even.

This year, with energy and grain prices softening, farmers apparently felt that they could go back to normal, and they increased the size of their herds. That turned out to be a big mistake, because in spite of falling prices, consumers aren’t increasing the size of their purchases. The result is a massive oversupply and low wholesale prices, killing the profits of farmers. Belgian dairy farmers yesterday dumped 3 million liters of milk in a staged protest, and the situation is not that much better elsewhere.

And it is not just beef and dairy products. There is a massive oversupply of chicken in the United States, even though people are eating more chicken than ever. But as consumers are eating slightly more chicken as they cut back on beef, the poultry industry planned for a large increase. Now one of the country’s largest chicken producers is in bankruptcy.

Pork is also in oversupply, though this is partly a consumer reaction to the suspicion that H1N1 flu originated among pigs in U.S. factory farms. Some smaller categories of meat are being hit in the same way.

The oversupply of meat and milk this year is global in scope, even though it is not really a global market. Meat and dairy products are mostly consumed in the country of origin or a neighboring country because of the high cost of rapid refrigerated shipping. Nevertheless, this year I have read news reports of farmers’ complaints about collapsing wholesale prices for meat and milk in the United States, Australia, Europe, and South America.

Why aren’t consumers rushing back to buy meat and milk the way the farmers expected? I think there are several effects you can point to:

  • Consumers have established new habits of grocery shopping and eating that don’t include so much meat and milk. Having gone to some trouble to shift their habits, they aren’t about to just shift right back.
  • The perception of beef in particular (in its unprocessed form, as opposed to hamburgers and hot dogs) has changed. Once thought of as an everyday food, it is now reserved more for special occasions.
  • Prices are still very high by historical standards. Beef prices that are 30 percent lower than a year ago may still look shockingly high to consumers who remember the prices of five or ten years ago.
  • There has been a movement away from meat and milk for years anyway. Consumers are concerned with health effects and increasingly are concerned about obesity and the environmental effects of production. A series of highly publicized food safety lapses this year, including the largest beef recall ever, have amplified the health concerns connected to meat. In the United States there is some concern about the way consumption of meat contributes to the country’s troubling trade deficit.
  • Consumers have less money to spend, and they may find it easy to cut back on the most expensive food they buy than in most other areas of their spending.

Farmers, for their part, may have been a little too eager to produce extra this year to make up for low profits in the last two years. Yet the result of the oversupply is another year of low profits for many farmers.