The Story Behind the Beef Price Boom

by Gregg Doud                                              

The current combination of feeder calves above $100/cwt., fed cattle above $90/cwt. and consumers willing to put a $10-per-pound ribeye steak in their shopping carts is unlike anything this industry has ever seen!  The big question most folks are asking is how did this happen?

Some assume that the answer is the discovery of a single case of BSE in Canada on May 20. True, there is no denying that the Canadian situation affected the U.S. market.  The Canadian situation reduced the supply of beef on the world market and the U.S. has moved to fill those gaps.  This has increased demand for a limited supply of live cattle.  As a result, feedlots are very current, carcass weights are down almost 30 pounds from last year and the replacement supply is tight.

Looking at the bigger picture, however, we must recognize that beef demand is a complex issue with multiple pieces.  Sorting through them is critical to understanding the entirety of the driving forces behind today’s cattle market.  The halt on Canadian imports amounted to about one-half of one week’s worth of U.S. beef production, and occurred in combination with an overall decline in total beef imports.  Clearly, this suggests that factors other than reduced beef supplies must also be driving this market higher. 

A closer comparison of the 2002 cattle market fundamentals to those of 2003 must also be made;  the $20-$25/cwt. difference in fed cattle prices between last summer and this summer has as much to do with how poorly the market performed a year ago as it does with these current strong market fundamentals. Let’s examine the triggers leading to the current market conditions.

Fewer Imports, Better Exports

The discovery of BSE in Japan on Sept.10, 2001, collapsed Japanese import demand for beef 40-50 percent by the summer of 2002, and the U.S. struggled to find a solution for the sales loss to its largest export customer.

Australia responded by redirecting sales to the U.S. Canada also posted some heady monthly exports during this period.  U.S. beef imports between April-July 2002 tallied four of the five largest monthly figures in history.

However, from January-July 2003, the U.S. imported 198 million fewer total pounds of beef than in 2002. Due to drought, imports from Australia are down 77 million pounds so far in 2003 and Canadian beef exports to the U.S. are down 176 million pounds. These reductions are offset somewhat by a 55 million pound increase in imports from other countries (mostly New Zealand).

Canadian fed cattle exports to the U.S. for immediate slaughter are down 104,355 head; at 825 pounds each (approximate carcass weight), that is another 86-million-pound reduction in U.S. supplies through July.

Perhaps as important as this year’s 262-million-pound drop in Canadian beef supplies was the timing of that action.  The border closing came just in advance of buyers filling orders for the seasonal high point in beef demand, July 4.  With the U.S. cattle inventory already smaller than 2002 and with carcass weights down, there was less available supply in a period of strong demand and this allowed cattle feeders to leverage their position with packers.

Reduced Canadian imports (live and beef) combined with less U.S. cattle supplies and a very strong domestic slaughter resulted in beef production declining 2 percent between April and July of 2003 versus the same period in 2002. Production dipped while demand remained strong, further strengthening prices.

With Canadian beef supplies removed from the world supply, the U.S. got an international sales opportunity that removed a lot of the typical, seasonal, post-July 4 downward pressure on beef prices. After spending $9 million in beef checkoff and U.S. taxpayer money to rebuild Japanese confidence in beef during 2002, U.S. beef exports to Japan have improved significantly (over 20 percent or by $206 million) in 2003.

Restoring beef exports to Japan has nearly doubled the value from a year ago of sub-primal cuts such as the inside skirt and short plate.  The ability to once again earn a premium for these cuts in international markets versus having them anchor cut-out values at home has been a critical market event during 2003.

Competing Meat Supplies and Prices

Beef prices cannot be discussed appropriately without considering the impact of pork and poultry supplies and prices on the beef sector. In 2002, Russian’s ban on U.S. poultry imports increased domestic meat supplies, thereby pressuring prices lower across the meat sector in the United States.  This year, the pork and poultry sectors are recovering.

The 2003 rally in beef prices came while the combined U.S. beef, pork and poultry production during January-July was 49.073 billion pounds, or 1/10 of one percent more than 2002. Again, not only has some of the dramatic difference in U.S. meat prices occurred due to beef market fundamentals but also because poultry exports to Russia resumed, and there has been an upturn in U.S. pork exports. 

Strong Domestic Demand

The beef industry is experiencing a very strong demand for our product right now. Today’s beef prices are a classic illustration of a demand-led bull market. The first signs of a structural shift in beef demand occurred in 1999. Another shift took place during 2000-2002, with 2003 presenting another breakout to the upside in beef demand. These changes started long before the Canadian border was closed.

There are many reasons for this shift in demand, but  the long-term downtrend in U.S. beef demand has reversed. Dr. Wayne Purcell’s (Virginia Tech University) demand model indicated the best first quarter for beef demand in 10 years in 2003 and a more than 10 percent increase in second quarter demand versus the same period in 2002.

Leverage and Market Signals

All of this has led to a very current feedlot industry with a very low level of month-to-month carry-over in fed cattle ready for slaughter and the most current showlist in 20 years.   This has greatly improved the bargaining power for the feedlot owner with the packer.

A year ago, fed cattle futures prices were consistently at a premium to cash prices, signaling that these animals were worth more tomorrow than they were today. That prompted feedlots to hold cattle and increase carcass weights.

This year, the opposite is true. The futures market has tried to “fade” the market in anticipation of reopening the U.S. border to Canadian beef. This discount to the cash market sends the signal to sell now because tomorrow the animal would be worth less.

In this environment, one must be careful in using the traditional “rules of thumb” that relate changes in beef supplies to price. This year has been contra-seasonal for several months and that makes predicting future price trends (seasonality) that much more difficult.

How long will this trend continue? That depends on consumers’ (both domestic and foreign) willingness to pay, the price of competing meat supplies, the level of industry expansion, and other factors. For now, there appears to be little chance that supplies will increase to the point where they could overwhelm the marketplace. The key issue in the coming months could simply be whether U.S. consumers continue to ask for that juicy piece of steak on the menu.