Cattle and beef prices are at record levels in every industry sector,
from cow-calf to retail beef prices. These record prices are obviously
supported by a very unusual set of supply and demand circumstances. So
far in 2014, markets — especially fed cattle and wholesale beef markets —
have displayed unprecedented volatility as industry participants try to
sort out these unusual market fundamentals in a very dynamic market
environment. Both producers and consumers are reacting, not only to
current record prices, but also to their evolving expectations for
market conditions over the coming weeks, months and years.
Much attention is focused on the low cow herd inventory and the need
to rebuild. After many years of liquidation, the result of a variety of
factors impacting the beef industry, the current situation reminds us
that it is the cow-calf sector that is primarily responsible for supply
in the beef industry. Until cow-calf producers can and will expand the
cow herd, the industry’s ability to maintain beef production will be
limited. Cow-calf producers make decisions about herd rebuilding by
considering, not only current price levels, but also their expectations
about how high prices will go and how long they will persist. The
cattle industry has a long history of production and price cycles so
producers recognize that high prices now will likely lead to lower
prices at some point in the future…it’s the old adage that the best cure
for high prices is high prices.
However, the current situation is one of excess liquidation due to
external factors that have taken cattle inventories to a much lower
level than would have otherwise happened. The beef cow herd was poised
to begin expansion in early 2011, prior to the last three years of
drought. The beef cow herd then was some 1.8 million head larger than
today. Moreover, the last cyclical expansion began in 2004 with a beef
cow herd of 32.5 million head, with some 3.49 million more beef cows
than today. That expansion was brief and truncated by feed and input
market shocks; recession; and drought that contributed to the subsequent
liquidation since 2007. The path to the current herd level was long and
the recovery will similarly take several years which should factor into
producer expectations for most of the rest of the decade.
Demand is also affected by consumer expectations. There is
considerable industry concern about how beef demand will react to the
growing pressure for higher wholesale and retail beef prices. So far, it
appears that beef demand is holding up well. Pork supplies are dropping
now as a result of the PED virus and higher pork prices ahead will help
support higher beef prices. However, abundant broiler supplies and
relatively cheap poultry prices have, somewhat surprisingly, led to
little substitution of chicken for beef so far. Consumers may be
reacting differently to higher beef prices, in part, because of the
expectations they have for the future. Considerable media attention has
been drawn to the fact that beef prices will likely be high for an
extended period of time. If consumers believed high beef prices were a
short term impact, they would very likely avoid the high prices and
substitute away from beef. However, the prospects for high prices for an
extended period of time may be causing consumers to have more of a “get
it while you can before the price goes even higher” attitude. Consumer
preferences do not change easily or quickly. Consumers resigned to
higher beef prices will make some adjustments but will continue to
purchase beef.
