Many producers have questions about the cattle prices we are seeing in early 2011. Specifically, they want to know if these prices can be maintained and where prices are headed. They wonder how much higher feeder prices can go, if consumers can afford high retail prices and whether or not current prices are a true reflection of the marketplace. This article will examine some facts about cattle market supply and demand, and how current price levels came about.
First let's focus on demand. There are two main components to beef demand - domestic and international. In the United States, retail beef demand has been in a downward trend since 2004. However, retail all-fresh beef demand increased year to year between 2009 and 2010 for the first time. This was in the face of a recession, which makes it all the more impressive. Currently, many economic indicators point to a sustained recovery, hopefully helping to reduce unemployment and put dollars back in consumers' pockets. If history is any indication, people will spend some of those dollars on food and food products, including beef.
Recently, international demand has been a driver of domestic increases in the price of beef. Exports have risen to almost pre-bovine spongiform encephalopathy (BSE) levels. Demand has been fueled by supply issues in other countries and a lower U.S. dollar. Again, most indicators point to increasing exports as developing countries continue to grow. This factor alone is a huge opportunity for the beef industry.
The next factor raising cattle prices is the inventory of cattle and, more specifically, the beef cow inventory. On Feb. 1, 2011, the USDA published their semiannual report on cattle inventory levels as of Jan. 1. Estimates for total cattle inventory levels were 92.6 million head, with beef cow inventory levels estimated at 30.9 million head. On a percentage basis, this is just over a 20 percent decrease in the last 30 years for beef cow numbers. Both of these numbers were decreases from 2009 (beef cow inventory was down 1.6 percent) and continued a long decline in inventory levels. Inventories continue to decline as cow slaughter and heifer feedlot placement remain above the five-year average, indicating that producers are not retaining heifers for replacements in their herd. One reason for the decline in beef cow numbers and heifer retention is drought and the response to relatively low profitability in the cow/calf industry. An additional reason may be improved technology and genetics in the cattle industry that have increased the beef production per cow, eliminating the need for the number of head maintained in the U.S during the past. The U.S. is producing more beef per cow; however, this has not been enough to increase total beef production.
When you combine flat to slightly increased domestic demand, increased exports and historically low inventories, prices have nowhere to go but up. This has led us to today's situation - historically high price levels for feeder cattle and live cattle. This is a very real event and, barring an unforeseen catastrophe, unlikely to go away in the next two or three years because of the production timeline for developing replacement females. Therefore, I would encourage cow-calf producers to take advantage of the current situation. Use it as an opportunity to fine tune your cow herd, secure profits if you are fearful of a price setback and build net worth for the next few years to ensure your business is competitive in the future.