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Beefs and Beliefs

Economists Cheer But Fear High Cattle Prices

Supply drive market pumps money into beef production but is pushing consumers away.

 

It's not often I go to a cattle meeting and come home with a load of great information and story ideas but it happened this week.

A lot of the material I gathered at the Cattle Trails Conference in Lawton, Oklahoma, will become stories in future editions of Beef Producer, so I'll just highlight in this blog some economic discussions I found particularly intriguing.

I thought one of the most valuable was the combination of Derrell Peel from Oklahoma State University and Stan Bevers from Texas A&M giving the macro/micro-economic viewpoints of the beef industry. Peel is a beef market analyst and Bevers works mostly as ranch-level analyst.

Both men agreed calf prices are likely to progress in 2015 and possibly in 2016 to new records.

This supply-driven market will be pushed further north by high calf prices and the message the market is sending to cow-calf producers to produce more calves, they agreed.

Peel added the historical "cattle cycle" is likely not dead and showed graphs to that effect. He said it was never a 10-year cycle but averaged about 10 years. This last cycle appeared to be turning up more on a 14- to 15-year cycle back about 2009 and 2010 when heifer retention bumped up. But large-scale drought across the Southern Plains and into the Rocky Mountain states, followed by later drought expanding clear into the Northern Plains and Midwest, appeared to halt that.

Peel added that USDA's annual cattle and calves report this year showed 18.8% of cows retained as breeding stock were heifers and that is a record number. He predicted the same report in January 2015 will show even higher heifer retention.

Peel and Bevers said they believe we now are likely 2.5 to 3 million cows short of where we should be for a more functional and competitive position but retaining 20% of 29 million cows is less effective as a herd builder than retaining 20% of 33 million cows..

Bevers warned again that those who spend too much trying to expand will put themselves at risk when the tide finally turns up on beef supply and down on price. If you read the upcoming January edition of Beef Producer we have a great story with Bevers on this very topic.

Queued by a comment from the audience, they discussed briefly the bugaboo of "quality" and "the best genetics we've ever had" by reminding the crowd that 60% of all beef sold moves into shopping baskets as ground beef and that most of those quality calves never garner "quality" prices for the ranchers who are producing them.

However, their conversation at the meeting never delved very deeply into the retail market dangers created by short supplies and record prices. Yet the day before, specifically on Monday of this week, Peel had warned of such problems in his newsletter.

He noted that record-large carcasses have actually shown decreases in quality grades. This is negative because the markets for highest-quality branded beef have remained a bright spot in the markets. Second, Peel said, ever-larger muscles from those big carcasses are pushing the limit on consumer spending, which Peel notes is based on volume of dollars.

When I got home, a newsletter from private economist Bill Helming was in my email box. It shared similar predictions and concerns.

Helming suggests fed-cattle prices will average 2-4% higher in 2015 than in 2014. He also said prices for calves, stockers and feeders should average 5-10% higher next year over averages for this year.

Helming continued sounding the same alarm he has for many months now. He said, "Consumer beef prices are for sure now resulting in consumer beef demand destruction. Many protein consumers have turned away from beef in 2014 because of high prices. This trend will continue in the years 2015 and 2016."

Helming has long tracked switch by consumers away from whole-muscle cuts and toward ground beef and he has warned that this is a big part of the ongoing decline in US beef consumption.

He said the beef industry is going to continue to lose market share, while poultry and pork will gain market share at the expense of the US beef producers. This is simply a cost issue, Helming reminded his readers, because American consumers are being squeezed economically at most levels. He noted continued relatively high unemployment, reduced worker and family incomes and wages, and continued much slower than normal economic growth as the overarching downward pressures.

Bevers correctly noted that the price of motor fuel could have a major effect on whether consumers believe they can afford beef or other things they may consider "luxuries." He correctly noted that high gasoline and diesel prices were a major contributor to the "great recession" that began in 2008.

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