Supply and Demand Still Make the Market Work

By Todd Kalous, Cattle-Fax

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Click here for graphic of Annual Average Fed Steer Price

Through the first eight months of 2006, the U.S. cattle and beef industry has experienced increased slaughter rates and increased production totals in nearly every category.  While fed cattle prices have been extremely volatile, exports and the balance of trade have begun to swing in a more positive direction.

Through August, total cattle slaughter was up about one million head compared to a year ago.  For the year, total cattle slaughter is on pace to increase 5 percent compared to 2005 and total nearly 33.9 million head.  The increase in slaughter over a year ago is the result of both increased fed cattle slaughter and increased cow slaughter.

With the drought forcing many producers to ship more cows it is likely that herd rebuilding will be slower than previously forecast for 2006.  Cow slaughter was up 10 percent through August and is expected to total 5.3 million head in 2006.  However, this would still be the third smallest cow slaughter in over 30 years.

As a result of the increased slaughter levels and larger carcass weights, total beef production is projected to increase almost 6 percent for 2006.  That said, the balance of trade is slowly becoming more favorable as beef exports continue to increase and imports decline.  As a result, net beef supplies will increase about 2 percent (due to the larger U.S. production) and total near 28 billion pounds in 2006.

Bottom Line: Fed cattle prices have experienced major volatility from highs to lows, but on an annual average basis, fed cattle prices are on the way to averaging near $86/cwt., about 2 percent below the 2005 average price.  At the same time production and net beef supplies are projected to increase for 2006.

Following supply and demand, if supply increases, you would expect price to decrease.  Some people might say this is just a coincidence, but supply and demand still pull and push price toward a market clearing level over time.  However, producers will have to learn to adapt to the abrupt and violent price swings that occur in the short-term.  In the long-term, supply and demand will still win out.