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Purdue Economist Says Owning Cattle Now Looks Like Stroke of Genius

Purdue Economist Says Owning Cattle Now Looks Like Stroke of Genius
Expect consumer and retail prices to trend upward this summer. But, Chris Hurt doesn't think demand will keep pace.

In a few short months, cattle prices have staged a seemingly miraculous comeback. In December, finished cattle were $80 per hundredweight, now they are $100 per hundredweight. Calves were $1.05 per pound, now they are over $1.30 per pound.

"Suddenly, owning cattle looks like a stroke of genius," says Purdue University Extension economist Chris Hurt.

According to Hurt, the reasons for the comeback are clear. The world economy continues to recover, feed prices are lower, red meat supplies are down, exports are strong, and retail beef prices have been low. Now the question is, can it last?

U.S. beef production this year has been down 1%. A somewhat higher rate of slaughter has been more than offset by lower cattle weights. However, Hurt says there are even more important reasons to explain why cattle prices are so strong.

"U.S. and international consumers are feeling more confident, and they are competing for reduced meat supplies around the globe," Hurt adds. "Foreign consumers want more beef from the United States and from other exporting countries."

In the first two months of 2010, U.S. beef exports were up 24%. At the same time, U.S. beef imports from competitors like Australia, New Zealand, and Brazil were down 23%.  The result of modestly smaller U.S. production with such strong exports and reduced imports is that beef supplies per person in the United States during the first quarter were down about 5%. Similar data for pork reveal a 6% reduction.

"Retailers have kept beef prices low in early 2010, and this has kept consumers fighting for reduced beef supplies and assisted in the cattle price surge," Hurt adds.

Retail beef prices in the first quarter averaged $4.23 per pound, which was down 10 cents per pound from a year earlier. Lower beef prices help to stimulate consumers to buy more beef. Hurt says one of the reasons live cattle prices are so much stronger is because retailers had not yet moved their retail prices higher.

In the first quarter, as retail prices were down 10 cents per pound, retail margins dropped by 20 cents per pound. "This means that retailers primarily absorbed the higher wholesale beef prices at the expense of their own margins," Hurt notes. "In essence, this creates a period of seemingly strong demand because retail prices do not move up as quickly as wholesale prices."

According to Hurt, the positive demand benefits of narrow retail margins and lower retail prices will not continue as retailers will be increasing beef prices this spring and summer.

"We can expect to see retail prices move back to record high levels, which were $4.46 per pound in the third quarter of 2008," Hurt adds. "In fact, it is likely that consumer prices will set new records this summer and fall. Given the weakly recovering economy, consumer demand may not appear so robust this summer with record-high beef prices in grocery stores and restaurants."

Most important is the question of whether these strong prices continue. Hurt said the answer is yes, but not as strong as is being experienced this spring.

"Per capita beef production should be down about 2% to 3% for the rest of the year, but the smallest of those supplies is expected this spring," Hurt said. "The economic recovery continues to grow momentum in the United States, and that is likely to continue, although unemployment rates will be slow to drop. On the negative side of the ledger, higher retail beef prices will cut into consumption by this summer and fall."

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