Demand factors are very strong and certainly play a big role in driving stronger cattle prices. Supply-side factors are also supportive and are changing.
Commercial beef production in the first three months of 2022 increased 1.8%, compared to the same period last year, but is forecasted to decrease 1.7% overall in 2022 compared to 2021. Forecasts call for a 3.0% year-over-year decline in beef production in 2023.
As background, aggregate supply in the beef market represents the amount all beef producers are willing to sell over a range of prices during any given time. At the individual level, a beef producer may be willing to sell a particular quantity if the market price is equal to or greater than the cost of producing that quantity. The market supply is then the total of the quantities that all individual beef producers choose to bring to market at various price levels. As a result of this process, the fed cattle supply is a set of price-quantity pairs that represent the number of fed cattle that producers are willing and able to supply to the market at alternative prices.
The market sends price signals up and down the chain to drive both quantity supplied and quantity demanded. The supply of fed cattle drives wholesale and retail supplies of beef. Feeder cattle supply drives the supply of fed cattle. The supply of calves drives the supply of feeder cattle. Likewise, domestic and export consumer demand drives demand for wholesale beef. Wholesale beef demand drives demand for fed cattle, and so on.
Understand price-quantity relationships
Calf prices some years are $170 per cwt, and some years are $250 per cwt. In a $170 market, some producers receive $160, and others receive $180. In a $250 market, some producers receive $240, and others receive $260. Why? A high price level for calves results from supplies that are too small relative to the demand for calves.
Calf prices can vary above and below the market price level for many reasons. For cow-calf producers, the factors that can affect the quantity of calves on the market include the size of the cow herd and calving rate, cost of buying or raising replacement heifers, interest rates, and the availability and cost of feed and forage. The factors that affect the number and willingness of backgrounders and feedlots to buy calves include the characteristics of the calves, the time and place calves are marketed, the price of feed and the expected price of fed cattle — which provides prospects for profitability. Those relationships are the basis for sets of price-quantity pairs within that market.
Similarly, the costs of slaughtering, processing, transporting and packaging beef and required profits determine sets of price-quantity pairs that packers are willing and able to offer to fed cattle producers, and that they also ask from wholesale beef buyers. The costs of retailing and food service prep, and the required returns of those firms, are then added to wholesale values to determine a set of price-quantity pairs that grocers, restaurants and others are willing and able to offer at alternative prices to consumers.
The aggregate supply of beef can be represented graphically as an upward-sloping curve, or line, with price on the vertical axis and quantity on the horizontal axis. An increase in price will encourage producers to market more beef. That is, the relationship between price and supply is positive.
Several factors influence production actions of beef producers. These include the price of beef, the number of firms producing beef, technological advances, the price of inputs, the price of other products that could be produced, and such unpredictable events as weather.
Shifts in supply
Beef supply shifts occur because of a change in at least one of the supply-influencing factors, excluding the price of beef itself. Moving from a pair with lower price and lower quantity on the supply curve, to a pair with higher price and higher quantity is a quantity response driven solely by the change in price. That is a change in quantity supplied. It is not a change in supply. A supply shift is a movement of the entire supply curve to the left or right at all price levels.
The number of beef producers affects the beef supply in the same way as the number of consumers affects beef demand. The more operations producing, the greater and more competitive the supply. The opposite also applies. Fewer operations usually produce a smaller supply. The size of production is not strictly the number of operations, but also the size of those operations.
The number of U.S. feedlots has been declining over time. But the fed cattle supply has not changed as much. Nationally, the number of feedlots declined 75% from 1997 to 2017, but fed cattle sales declined by only 10% over that period. The average annual sales rose from 226 head to 814 head per feedlot. Meanwhile in Iowa, the number of feedlots declined 59% from 1997 to 2017, but fed cattle sales climbed 28% over that 20-year period. In Iowa, the average sales per feedlot rose from 125 head to 393 head.
Technology boosts supply
Technology is an important factor in supply. It has contributed greatly to the ability of producers to produce more with less. Genetic, nutrition and animal health advances, to name a few, have improved animal performance. This can be seen in steer carcass weights that have risen 165 pounds, or 22%, from 1990 to 2021. Technology has lowered costs — so at each price, producers offer more production for sale. Adoption of technology remains a prime factor, shifting the supply curve rapidly outward or limiting backward shifts.
The price of inputs can also change the position of the supply curve. If the price of inputs declines, producers can generate more output with no change in the cost of production. Conversely, if input prices rise, producers may produce less to hold the line on production costs. For example, if the price of corn rises, producers will either feed less corn, or up their total expenditure on corn.
Feedlot cost of gain is projected to be 57% higher in 2022 than it was a mere two years ago, in 2020. Rising feed costs may affect cattle weights. As cattle weights rise, cattle eat more feed per pound of gain. Producers looking to minimize feed costs might sell at lower weights, which would reduce beef supplies. Producers would need to weigh this proposition against the increased revenue from selling cattle at higher prices.
Factor in prices of alternatives
The price of alternative products acts on supply in a way similar to how the price of substitutes and complements act on demand. In particular, if the price of a substitute product changes, producers may switch their production decisions. In crop production, this switch can be fairly pragmatic. For example, the Russian invasion of Ukraine is disrupting world wheat supplies, which may entice U.S. farmers to grow more wheat and less corn. The reverse can be the case, too. Many crops are at prices that compete for acres.
In animal agriculture, the switch isn’t as simple. Switching from cattle to hogs, for example, means a completely different production system, with different marketing considerations. Livestock producers do not switch, or add or subtract, enterprises based on changes in annual prices. These are multiyear, possibly multigeneration decisions.
Consider bottom-line impact
Even after all production inputs have been employed random influences on beef supply continue. Weather is one. I think it was Drew Carey on “Whose Line Is It Anyway?” who said, “Welcome to the Midwest, where the weather is unpredictable, and the forecast doesn't matter.”
Shifts in supply due to weather can be short-term — such severe winter weather that prevents travel that may close a packing plant or auction barn for a day or two and thereby shifts the supply of cattle and beef. These shifts are typically balanced out in a matter of days or weeks depending on the disruption.
Building drought impacts and limited forage prospects have short- and long-term implications for supply. Initially, producers send more cows and heifers to slaughter which increases the beef supply. But this liquidation eventually leads to tighter supplies going forward.
If supply decreases and demand stays the same, the equilibrium price will rise. If supply decreases and demand increases, price will increase. If supply decreases and demand decreases, price could increase, it could decrease, or it could stay the same. What happens to price depends on how much supply and demand shifts.
Schulz is an Extension ag economist with Iowa State University.