Dillon Feuz: Beef demand on the rise for several reasons
Fed steer prices in Nebraska through mid-August have averaged $112 per hundredweight this year. Over the same time period last year they averaged $92 per hundredweight. That is a price increase of 22 percent relative to last year. Is there one reason, or several reasons, for this price increase? As an economist, I am always going to look at supply and demand to try and answer this question.
Let’s begin with supply. Even though the U.S. cattle inventory has been declining for the past few years, this year the number of fed cattle marketed on a monthly basis has exceeded the prior year in four of the first seven months of the year. In two months, fed cattle marketing numbers have been about equal with last year and in only one month have the number of head marketed been lower. Through the first seven months, the total number of fed cattle slaughtered has been greater this year than last year. If everything else had remained unchanged from last year (it obviously hasn’t) then I would have expected fed cattle price to be lower rather than higher than last year’s prices.
Total beef production has also been greater this year than last year. Fed cattle weights have been greater than a year ago and that has added more total pounds of beef to the market place. Again, I would expect price to be lower rather than higher based on these supply numbers.
Let’s consider beef trade and the impact it might be having on prices. Total beef and veal imports into the U.S. are down about 13 percent relative to last year. That tends to reduce the overall supply of beef that the U.S. consumer sees at the market place. Beef and veal imports are actually down 35 percent relative to the previous five-year average. Total U.S. beef and veal exports are up almost 30 percent over last year through July. Again, if we are exporting more beef out of the country, then that tends to reduce the domestic supply available to U.S. consumers. Beef trade has been a very positive in the last few years. Our exports are up over 200 percent over the prior five year-average and we are now back near pre-BSE trade ban export levels.
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So, as we consider the actual supply of beef available to U.S. consumers, accounting for domestic production, imports and exports, rather than having a supply increase this year over last year, there has been a slight decrease in supply. This would be supportive of slightly higher beef prices and be supportive of slightly higher fed cattle prices. However, I don’t think it would be supportive of 22 percent higher fed steer prices.
What about beef demand? How has beef demand held up in what seems to be a struggling national economy? It turns out that beef demand has increased this year over last year. Economists estimate that beef demand was up 4 percent in the first quarter of this year and up another 1.5 percent in the second quarter. I won’t try to explain all the details that economists use to come up with these estimates, but I will point out the two main components – which are the price of beef and the supply of beef. Retail beef prices have been up about 10 percent over last year’s prices. So, why do we not say that beef demand is up 10 percent? From the prior paragraph, I documented that the total beef supply available to U.S. consumers was actually lower this year when trade is considered. A lower supply would lead to higher prices, if everything else was unchanged. Therefore, in the current situation some of the 10 percent increase in beef prices in attributable to a decrease in supply, and the remainder is attributable to an increase in domestic beef demand.
What does an increase in beef demand really mean? It essentially means that at least some U.S. consumers are willing to pay more for the same amount of beef they consumed last year, or perhaps some are actually consuming more beef and at higher prices. That is a simplified description, but hopefully you get the point.
I don’t know how it is in your neighborhood, but in many locations the steak restaurant chains are struggling a little in this economy. If that is the case, how is beef demand stronger? It turns out that except for a few people who buy locker beef, most U.S. consumers don’t have a demand for beef, but they have a demand for various beef products: steaks, ribs, roasts, ground beef, etc. Is the demand for each of these beef products the same? The short answer to that question is no. If you consider that we really have not changed how we cut up a beef in the last year, then the relative proportions of cuts should be about equal from last year to this year. However, prices for different beef cuts have been significantly different from year to year.
If we use the price for ribeye to represent the high value cuts from beef, we can see that prices this year for ribeye have been about equal to last year and about 5 percent lower than the previous five-year average. That does not sound like an increase in demand for beef steaks. However, looking at the prices for chuck, round and boneless trim; those prices have been up almost 20 percent over the prior year. That sounds like an increase in demand for lower value beef cuts.
So, what it appears that consumers are doing in this struggling economy is rather than buying a cheaper protein source, such as chicken, to substitute for steak, they are buying cheaper value cuts of beef and more ground beef. This is really a good sign for the beef industry. It appears that consumers are remaining loyal to their beef purchases.
Now going back to the original question – why are fed steer prices 22 percent higher this year than last year? I would say the two main reasons are a very positive beef trade (more exports, fewer imports) and a strong U.S. beef demand. That beef demand is particularly strong for lower-valued beef cuts, which actually make up the largest share of the beef carcass.
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