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Big beef supply is a given, so watch demand

Alan Newport Young cows on winter range
Prices across the beef complex face headwinds in 2018 and any successes will depend heavily on outside economic conditions.
Growing protein supplies will keep the pressure on in 2018, so economic conditions and exports are key.

Recent data shows beef consumption is increasing, but this has little bearing on demand.

"Increased beef consumption does not, by itself, indicate anything about beef demand," says Derrell Peel, livestock marketing specialist for Oklahoma State University.

"We are consuming more beef because we are producing more beef," he adds, explaining that beef demand is really a measure of what price consumers will pay to eat that beef.

Therefore, Peel says, we should expect that increasing beef supplies will result in lower prices. The question is how much lower. 

Peel expects retail beef prices to decrease in 2018 because of additional beef supplies, and in turn for that to push down wholesale beef prices, fed-cattle prices, and feeder cattle prices.

"However, if demand continues strong, the retail price pressure may be rather modest with less negative impact on wholesale beef and cattle markets," he says.

He also warns that good beef demand is dependent on generally strong macroeconomic conditions, including decreased unemployment and income growth. Any decline in overall macroeconomic conditions is a threat, he says, and says to watch rising interest rates and inflationary pressures for signals. He also warns financial shocks such as a jump in gasoline prices could limit consumer spending behavior and therefore beef demand. 

Peel also says continued improvement in beef trade will be crucial to any strength in beef prices in 2018. Continued strong exports to current major beef destinations including Japan, South Korea, Mexico, Canada and Hong Kong will be essential.

Don't expect too much from new export growth to China, Peel says. Also keep in mind China is working through serious debt and currency valuation problems.

The Livestock Marketing Information Center recently projected cow-calf returns may erode for the next two years. That's because the US calf crop is forecast to continue increasing throughout 2019.

"Unless domestic and foreign demand for beef comes in much better than anticipated, calf prices are expected to slip for the next two years," LMIC analysts said.

Kansas City economist and analyst Bill Helming agreed, noting in his most recent newsletter that US beef supplies are going to be up significantly in 2018 over 2017 levels. He said the situation will be the same in 2019 and 2020.

"Because of the significantly larger beef and competing protein supplies in 2018, 2019 and 2020, compared to year-ago levels, this is a major factor and reason why I believe the most likely price outlook scenario for beef cattle prices that will play out in 2018, 2019 and 2020 will be one of steady to 5% to 10% lower prices, compared to 2017 beef cattle price levels for September and October," Helming predicted.

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