Cull cow prices and beef demand
Cull cow prices typically raise 10-15 percent from the lows in November into March and then maintain those higher price levels throughout the spring and early summer. The price rally this year has been much stronger. Canner/Cutter grade cull cow prices were under $40 per cwt. in November 2009. By January of this year they had increased to near $45 per cwt. and now are over $50 per cwt. at the end of February. Bonner/Breaker grade cow prices have risen similarly. Those prices increased from $42.50 in November to over $55 per cwt. at the end of February. The increase from November to the end of February has been over 30 percent, or 2-3 times the typical increase.
What has driven this strong rally in cull cow prices? To an economist the answer is always the same: Supply and Demand. However, let us look at the supply issues and at the demand issues that I feel are most at work in this price rally.
During the first three weeks of November of 2009, federally inspected cow slaughter averaged about 133,000 head per week. For the first week of February this year, cow slaughter was 114,000 head. If I tell you that these slaughter numbers include beef and dairy cows, then you are going to jump to the conclusion that the dairy cwt. program was the culprit for low cull cow prices last fall. However, dairy cow slaughter was 52,500 head per week in November and was 54,700 head the first week of February. Doesn’t seem like you can blame the low prices on dairy, nor attribute the current high cull cow prices to a lack of dairy.
Interestingly, the reduction in total cull cow slaughter from November to February is a 17 percent reduction and that has been the typical decline over the last five years. That typical reduction in cow slaughter leads to the typical price increase of 10-15 percent. So, perhaps the reduction in the supply of cull cows being slaughtered is only accounting for half the current price increase; the typical price increase of 15 percent.
Demand for cull cows is much more difficult to measure and quantify than is the supply of cows. Many producers think that all beef from cull cows ends up being sold as fast food hamburgers. That is true for a majority of the product; about 60 percent of cull cow meat is processed into hamburger. However, that still leaves 40 percent of the meat that is sold as other product, such as: thinly sliced roast beef, pre-cooked products, and even steaks and roasts that are sold at lower-end restaurants, buffets and cafeterias. So, has demand for these products increased, and if so, why?
Consider someone who prefers to eat beef rather than eating lower priced pork or poultry. Perhaps that individual most prefers to eat a high quality and typically a high priced steak. Now if that individual has lost some disposable income because of the downturn in the economy, a high price steak purchase may be out of the question. However, that doesn’t necessarily mean the individual buys a pork chop or a chicken breast. They may instead buy a hamburger, or change restaurants and buy a cheaper, lower quality steak.
Now when this is the case, if we economists measure beef demand, which is based on both the quantity consumed and the price paid, we may find that total quantity consumed hasn’t changed but that prices have declined. More beef purchased at a lower price and less beef purchased at a higher price. We will conclude that demand for beef has declined. But, the reality may be that demand for high quality, high priced steaks has declined, while the demand for lower quality, lower priced beef cuts may have actually increased.
Evaluating the price spread between higher priced USDA Choice and lower priced USDA Select box beef prices reinforces this notion that demand for high quality beef has suffered more than demand for lower quality beef. Throughout 2009, the Choice versus Select price spread has been narrower than the average for the previous five years. For January of 2010 the spread was even narrower than in 2009. The current price spread is at historic lows and is less than $2 per cwt.
Prices for Choice box beef have increased six percent from November 2009 until February 2010. Prices for Select box beef increased by 11 percent over that same time period. Furthermore, prices for beef trimmings increased 24 percent from November to February. Cull cows supply lean beef for the beef trimmings market. Therefore, while you may have read or heard that demand for beef was down in 2009 and may still struggle in 2010, it appears that demand for lower quality beef and therefore cull cows is increasing.
This is probably an over simplification of what is going on in the cull cow market, but I think it does shed light on the market. Regardless as to the why of the current price rally, those producers who chose to feed cull cows this winter will likely receive a nice return. A quick analysis indicated that returns to cow feeding may be in the $50 to $100 per head range, depending upon ration and weight gain of the cull cows placed on feed in November and marketed at the end of February.
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