In a few short months, cattle prices have staged a miraculous comeback, the miracle could falter later this year.
The reasons for the comeback are clear, said Purdue University Extension economist Chris Hurt. The world economy continues to recover, feed prices are lower, red meat supplies are down, exports are strong, and retail beef prices have been low.
Beef production in the United States so far this year has been down 1%. A somewhat higher rate of slaughter has been more than offset by lower cattle weights. However, Hurt said there are even more important reasons to explain why cattle prices are so strong.
"U.S. and international consumers are feeling more confident, and they are competing for reduced meat supplies around the globe," Hurt said. "Foreign consumers want more beef from the United States and from other exporting countries."
In the first two months of 2010, U.S. beef exports were up 24%. At the same time, U.S. beef imports from competitors like Australia, New Zealand, and Brazil were down 23%. The result of modestly smaller U.S. production with such strong exports and reduced imports is that beef supplies per person in the United States during the first quarter were down about 5%. Similar data for pork reveal a 6 %reduction.
"Retailers have kept beef prices low in early 2010, and this has kept consumers fighting for reduced beef supplies and assisted in the cattle price surge," Hurt said.
Retail beef prices in the first quarter averaged $4.23 per pound, which was down 10 cents per pound from a year earlier. Lower beef prices help to stimulate consumers to buy more beef. Hurt said one of the reasons live cattle prices are so much stronger is because retailers had not yet moved their retail prices higher.
In the first quarter, as retail prices were down 10 cents per pound, retail margins dropped by 20 cents per pound. "This means that retailers primarily absorbed the higher wholesale beef prices at the expense of their own margins," Hurt said. "In essence, this creates a period of seemingly strong demand because retail prices do not move up as quickly as wholesale prices."
Hurt says the positive demand benefits of narrow retail margins and lower retail prices will not continue as retailers will be increasing beef prices this spring and summer.
"We can expect to see retail prices move back to record high levels, which were $4.46 per pound in the third quarter of 2008," Hurt said.
Hurts adds it's likely consumer prices will set new records this summer and fall. Given the weakly recovering economy, consumer demand may not appear so robust this summer with record-high beef prices in grocery stores and restaurants.
He says cattle prices should stay strong, but not as strong as they have been recently
Per capita beef production should be down about 2-3% for the rest of the year, but the smallest supplies hit this spring, Hurt said. The economic recovery is continuing, but unemployment rates will be slow to drop. On the negative side of the ledger, higher retail beef prices will cut into consumption by this summer and fall.