Following the markets and the constant flood of news that might affect the beef industry, as I do, can be confusing. So it’s important to step back from time to time and examine broader trends. The industry faces many challenges. But it has a bright future, and I believe this optimism is well founded.
The most important factor is the supply-demand equation. Prices for feeder and live cattle have fluctuated widely in the 25 years I’ve followed the markets. The highs and lows tended to correlate with contraction and expansion of the cattle herd more than with strength or weakness in demand. The market was more supply-driven, until the mid-1990s when industry efforts arrested the 20-year decline in beef demand. The market then became more demand-driven, and this included a steady increase in beef exports.
The other trend that’s occurred since the mid-1980s is that cattle prices have established new, higher trading ranges. Live-cattle prices in the early years traded between $60-80/cwt. The range gradually became $70-90 then $80-100. It’s too early to call the new trading range, but based on prices this year, it seems the market has established a new range of $100-120.
Barring an unforeseen catastrophe, I’m confident the range will hold for two main reasons.
• First, the U.S. and North American cattle herd keeps shrinking. There’s no sign yet of net heifer retention. Even if it emerges this fall, it won’t be until 2014 that any herd expansion will occur and we might have a U.S herd of only 90 million head by then. On a global basis, cattle numbers are also likely to remain flat, with the only expansion coming in Brazil and possibly Australia.
• Second, beef demand in the U.S. and globally has rebounded since taking a big hit in 2009 and 2010 due to the recession. U.S. retail demand in first-quarter 2011 was up 9.3% over the same quarter last year – an unprecedented year-on-year increase. Demand will remain above year-ago levels the rest of 2011, although the gains won’t be like the first quarter.
Meanwhile, export demand is even stronger. We’re selling more beef products at higher prices than last year and this is expected to continue, especially if the U.S. dollar remains weak against other currencies. Foodservice demand, from white tablecloth to quick service, is still rather weak but is improving somewhat.
The euphoria of record-high live cattle prices for several weeks (ending with a record $123.20/cwt. for a five-area steer the first week of April) has given way to the reality that such levels could not be sustained. As I write this, live-cattle cash prices have fallen $11 from that record high. But let’s put that in perspective.
Prices advanced $8 in three weeks to make that record high, and have now corrected back to more realistic levels. They will continue to decline into the summer because that’s what they do every year. But prices will likely remain well above $100, although this won’t be enough to offset some cattle-feeding losses in the coming months. Depending on what the summer lows are, prices will then strength back to $120 or higher, according to analysts’ forecasts.
Meanwhile, the industry is seeing progress on two crucial fronts – trade agreements and ethanol subsidies. The prospect of selling more beef to South Korea took a significant step toward becoming a reality in early May. The U.S. sold $518 million worth of beef to Korea last year and some say it might eventually become a $1-billion market annually for the U.S. It also seems the industry’s fight to end support for the ethanol industry is bearing congressional fruit.
All in all, it’s been largely a year of positives so far.