The Ramifications of Demand Growth Over Time

Beef demand growth has been nothing short of phenomenal during the last five years but especially during 2003.  Fed cattle demand has been record high in each of the first eight months of 2003.  But beef demand has shown a remarkable recovery during the last five years.  Beef spending has grown $14 billion dollars compared to the decade of the 1990’s.  This means that every person in the United States spent $40 more on beef each of the last two years compared to the 1990’s.

Implications for Fed Cattle

Keep in mind that the growth in demand occurred well ahead of the border closing in Canada.  It is very difficult to sort out the difference between beef demand and bargaining position but with the smallest front-end supplies in history, the feeding industry has gained a tremendous amount of leverage.  Surprisingly, packer margins have remained extremely positive.  Margins have shrunk for retailers and food service operators but remain positive for most everyone else in the chain. Demand growth has been responsible for a $175-$200/head increase in the value of a fed steer or heifer in 2003 compared to the 1994-1998 timeframe.

Cow/Calf Profitability

If the growth in demand can be sustained during the next four to six years, it is highly likely that calf prices will remain at price levels that are profitable for at least the top 50 percent of cow/calf producers, even when prices are testing the cyclical lows during the later half of this decade.  Of course, grain prices would need to stay in check for this to hold true, but this suggests that "high return" producers may move through an entire 10-year time period without losing money on the calves they produce.  Keep in mind if we look back at the last 30 years, cow/calf producers have only been profitable about half the time.

There has been much discussion in recent weeks pertaining to the price levels of cattle and beef.  Many suggest that it is simply a supply lead bull market.  No doubt supplies are tight and the industry is extremely current but demand has been just as key to the dynamics of the price move as supply.  The tightest fed cattle supply in over 20 years combined with the strongest beef demand in years puts this market in uncharted territory.