The magical January spike in cattle prices illustrates the potential that could lie ahead for the U.S. beef industry.
Watching wholesale beef prices balloon $40/cwt. (Choice) in less than a month had that busted-cinch kind of feeling. It was sudden and exciting but tempered by the dread of what might be on the other end.
Turns out, all that was waiting was a long-overdue price adjustment that lifted post-spike wholesale and cash fed cattle prices higher than anticipated.
The magical January run was the product of several disparate market components that came together at the same time.
First, Derrell Peel, Oklahoma State University Extension livestock marketing specialist, points out beef production was 2.3% lower year-over-year in the last quarter of 2013. Beef production last year was 1% less.
Second, Peel explains retailers typically wait to restock in a new year until they see the final tally for holiday sales. According to the January Cold Storage report, total pounds of beef in freezers on Dec. 31 was 3% less than in November, and 6% less than a year earlier. By not purchasing inventory, buyers were, in effect, taking a short position in the cash market, a position that had to be covered when supplies were the sparsest.
Supplies grew snugger than anticipated because of the extreme cold that gripped much of the nation in early January, disrupting the beef supply chain. The cold snap also robbed production from cattle on feed.
“There was enough panic-buying to take wholesale beef values to the levels we saw,” Peel explains.
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Rather than an early, hyper-exaggerated seasonal trend – wholesale prices usually begin drifting upward from January to March or early April – Andrew P. Griffith, University of Tennessee agricultural economist, says it was a long-overdue price correction.
“We had a sort of perfect storm of short-bought buyers, coupled with the expected decline in beef production and the weather impacts,” Griffith says. “We found out that when packers need cattle, they’re willing to pay up for them if they can get a higher price on the other end.”
Where to next?
“I think we’ll see wholesale beef prices come back $10-$20/cwt.,” Peel projected toward the end of the price run in late January. “But, when you start at $240, that kind of decline still leaves us ahead of where we thought prices would be.”
At the time, Peel said he expected prices to drop back significantly, then return to a more seasonal trend. But he was quick to note: “We’re in unchartered waters at these price levels.” Sure enough, by Jan. 30, Choice boxed-beef cutout value had already retreated about $12.50/cwt.
Though the price incline came steeper and sooner than many analysts expected, Peel says, “The idea that the market could do this is not a surprise. The underlying fundamentals are long-term in nature.”
For one thing, there’s the smallest cowherd since the 1950s, according to the latest USDA Cattle Inventory report. If Mother Nature will allow producers to follow through on the expansion plans suggested by the increased 2% of heifers being retained for replacement, there will be even fewer cattle to grow and feed for a spell.
The other underlying long-term fundamental is beef demand. The Beef Retail Demand Index (BRDI) for all fresh beef increased 1.8% last year. It was 3.57% higher the year before that, following a 1.96% increase the previous year. The quarterly RBDI for Choice was up, year-to-year, 4.35% and 3.06% in the last two quarters of 2013.
All through the recent recession, some consumers traded down in their beef purchases in terms of cut and frequency, but most proved stubborn about quitting beef altogether. The recent price spike suggests more of the same.
“When you look at the individual cut prices, it was the end meats carrying both cutouts (Choice and Select),” Griffith explains.
“The market rally was driven almost entirely by chuck and round products rather than middle meats (rib and loin),” Peel says. “Additionally, the cutter-cow cutout was up $10/cwt. from year-ago levels; all of which indicates that this rally is driven mostly by ground beef and processing-beef demand. The more than 11% drop in cow slaughter in the fourth quarter of 2013 probably played a significant role in setting up the supply reductions that helped drive the January rally. The unusually small Choice-Select spread at this time is due to a combination of increased demand for Select and decreased supply of Select relative to Choice.”
In other words, Peel explains, consumers so far have traded beef for pork and poultry to a lesser degree than some expected. One reason for that is that the price differential between beef and competing meats has remained narrower than anticipated.
For pork, prices look to stay elevated due to less production than expected because of the outbreak of porcine epidemic diarrhea virus (PEDV). Meanwhile, Peel says chicken didn’t see the pop in the wings market through the holidays and leading up to the Super Bowl as it had in recent years.
Retail price prospects
“When you get behind this time of year, you can be in catch-up mode through most of the spring,” Peel says. “If the Choice cutout settles at $220/cwt. as an example, that’s a 10% increase from where the year began. That translates into a retail beef price increase of 6%-8%, assuming that retailers remain willing to absorb some of the increased cost. By the end of the year, we could possibly see a 10% increase in retail prices.” He notes that retail prices increased 10%-11% in 2011.
Aside from the fact that retail prices lag increases and declines in the wholesale market, Peel says, “Retailers have been planning for price increases for about two years and had some cushion in their margins.”
“Overall, I see cattle and beef prices going up in the next six months,” Peel says.
“I think we’ll see a more seasonal trend with the price peaks and troughs less exaggerated,” Griffith says.
When producers fret to him about beef pricing itself out of the retail market, Peel says, “Think back 5 or 6 years ago when gasoline prices doubled. They’ve gone down a little bit since then, but did people stop buying gas? No. You make adjustments. Some consumers have to make larger adjustments than others, but people don’t stop buying beef.”
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