A few thoughts by John Nalivka: Market reality
November 10, 2016
Over the last few months, I have had many conversations with ranchers about the current market and of course those conversations mostly center on the cause of this sharp price drop. The follow-up question is where the market is headed.
There have to be some straight-forward answers – right? My response is that after spending the last three decades analyzing the market, the answer to what happened may still not always be that obvious.
But there are a few common denominators.
First, the U.S. experienced severe 100 year back-to-back droughts in 2011 and 2012. These droughts occurred in the Southwest and Midwest (the two major cattle producing regions) and as a result, the U.S. cattle inventory was liquidated to a 60 year low in a relatively short time. Beef production in 2014 fell sharply and was only propped up by record high carcass weights. At the same time, the U.S. pork industry felt the impact of PEDv. Consequently, pork production also dropped sharply during 2014. Nothing in this paragraph is new to anyone in the beef supply chain from producers to end users.
Taking this information the next step – per capita meat supplies dropped from 222 pounds in 2007 to 202 pounds in 2014, a 10 percent decline while exports for both beef and pork rose sharply. Together, tight supplies coupled with strong demand led to record prices and record producer margins.
Record margins and a return to normal feed supplies, both grass and grain, provided the incentive to rapidly expand herds – both cattle and hogs. Cattle and hog herd expansion will push production up significantly – 4 percent for beef, 10 percent for pork, and 6 percent for chicken – during 2016 from the 2014 low. Per capita total meat supplies will increase from 202 pounds in 2014 to 215 pounds in 2016! Importantly, beef exports fell 12 percent during 2015, pork exports fell 4 percent, and broiler exports dropped 13 percent as the dollar strengthened over 20 percent.
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Production increases and ultimately, the beginning of beef herd liquidation during 2017 will push per capita total meat supplies to 218 pounds and just 4 pounds short of where this all began a short decade ago!
So my answer to what happened? In simplest terms, producers responded to record profit and total meat supplies increased sharply. That's capitalism!