The reason for high beef prices and where we are going in 2014

The current beef market is on an upswing that is unprecedented, especially for this time of year. The uncertainty of relief, if at all in the next year, bears some explanation. I hope to shed some light on what has lead up to these historically high prices.

A typical beef cattle cycle is approximately seven years. In simple terms, Cattle on feed numbers will fluctuate with how the price of feeder cattle (cattle going into the feed lot to be readied for market) rise or fall. In the upswing of prices, cattlemen will hold on to Heifers (females) for breeding. The calves they produce will then eventually end up as feeder cattle. Usually between 18 to 22 months of age.

Reciprocally, as feeder cattle prices begin to fall, Heifer retention falls and less feeder cattle are produced. This tightens up supply, prices begin to rise, and the cycle repeats.

The first salient event in the cattle cycle was the Mad Cow disease scare in May of 2003. That year the Canadians discovered infected Animals, and soon after the United States discovered their own. This resulted in the banning of all Canadian animals from entering the U.S., and subsequent export markets doing the same. A large amount of the beef supply that had previously been entering the U.S. was gone.

Corn prices had the next big impact on the cattle cycle. In 2008, record high corn prices, a result of the Mid-West’s persistent drought and Government mandated U.S. corn only for Ethanol production, resulted in record highs. These prices could not be absorbed by cattlemen, and had to be passed on to the consumer. Initially beef processors did not give farmers the value for the more expensive feed they had to feed their animals.

Although they eventually did, the losses that some farms sustained led some to look for alternative sources of income for their farms. Ironically, corn was a crop they could make more money on than raising cattle.

What these events have done is to remove cattle producers from the market. Also, the median age of the current cattleman left producing cattle is about 57 years old. There are very few young farmers willing to take on the cattle market. There is more profit and less effort in raising cash crops like soybeans and corn.

Every year for the last 20 years there has been fewer cattle on feed in the United States. It stands now as the lowest in modern cattle history. And U.S. beef production is expected to decline this year  as much as 7% by year end.

So, where we stand today is a continuing downward trend in available cattle. A risk adverse, shrinking group of cattle producers, that are not going to add more cattle for the near term, and long term seems less likely. Beef consumption in the United States has fallen since before the recession. Prices remain high and are going higher. Feeder cattle have been setting records each week since the beginning of the year. And this is only the first quarter of the year. May, June and July are the month’s when beef typically hits its highs for the year.

Also remember that retail drives the beef business. Retailers are featuring winter types of cuts; chuck roasts, round roasts, chuck flap and the like. The beef processors have squeezed every nickel of price increase they can get out of these cuts, including ground beef, and are now advancing the prices for middle meats, in particular tenderloins, since this is the steak muscle most in demand.

The bottom line is, beef prices are not going down, and the real question is, when will they stop going up?

Mike Devitt
VP of Marketing
Indian Ridge Provisions