Cattle prices have been moving higher, but not to the same extent as beef prices.
For the first eight months of this year, fed-steer prices are 18.9% above the 2018-19 average for January-August. Feeder steer prices are up 13.2%. While these are solid increases, they fail to match the rise in Choice boxed beef prices (+22.1%) and Choice retail beef prices (+27.4%) over the same period.
There have always been ebbs and flows throughout the cattle and beef marketing chain regarding market leverage and relative prices. When feedlots are chasing a relatively tight supply of available feeder animals, feeder prices tend to outperform fed-steer values (think late 2014 and most of 2015). When the number of finished cattle in feedlots strains available beef processing capacity, processing margins increase.
Now that we are about 2½ years removed from the extreme turmoil that the COVID-19 pandemic wrought upon the cattle and beef supply chain, it is instructive to consider how recent marketing margins have changed relative to before the pandemic, and what the continued evolution of these margins might look like in the years to come.
Retail price analysis
Margins during 2020 and 2021 were omitted from the graphic below because of the extreme nature of events that affected them during this period. Although typical supply and demand forces were also at work during this time, external shocks to the system because of the pandemic often overwhelmed normal market responses, and hopefully, they are not repeated anytime soon.
When we compare the first eight months of 2022 to the same period of 2019, we are in a much different situation today with the beef retail-wholesale spread. Accounting for $3.61 per pound of the Choice retail beef value thus far this year, that spread has increased by 96 cents per pound relative to before the pandemic. Meanwhile the wholesale-farm spread is 24 cents higher.
Comparing the three most recent months of data (June-August) to the same period of 2019, the retail-wholesale spread is 88 cents higher, while the wholesale-farm spread is up 7 cents.
The retail-wholesale beef spread tends to be more affected by general macroeconomic factors than the wholesale-farm spread.
Supply chain pressure
With labor, energy, transportation and packaging costs much higher today than pre-pandemic levels, it is not surprising that retail-wholesale spreads for many commodities have increased. But how likely are they to return to pre-pandemic levels?
Examining annual USDA data on the beef retail-wholesale spread from 1970-2019, there have been 14 out of 49 years when this spread did decrease amid its general upward trend. However, the largest percentage decline relative to a prior peak has been 10%, with declines typically smaller than 6%.
This provides some optimism that the spread could work lower if macroeconomic inflationary pressures ease, but that chances for returning anywhere near pre-pandemic levels are slim.
Consumer beef demand has recently proven very resilient, and there is still optimism that tight cattle supplies in the next few years will provide further price increases to producers. But as costs for everyone in the beef supply chain have risen sharply since 2019, the percentage of retail dollars reaching the farm level will struggle relative to the pre-pandemic average.
Brown is a livestock economist with the University of Missouri. He grew up on a diversified farm in northwest Missouri.