– Will Secor, Ph.D., Assistant Professor & Extension Livestock Economist, Masters of Agribusiness (MAB) Coordinator, Department of Agricultural & Applied Economics, University of Georgia
Long run supply fundamentals appear to be shifting.
After a couple of wild weeks in cattle markets, let’s take a step back to review the bigger picture. The supply side remains tight with limited opportunities to expand in the short run. Cull cows from the dairy sector may offset some of the reduction beef cull cows on tighter dairy margins. However, this offset is partial. Additionally, dressed weight increases may be topping out. In September, year-over-year increases in cattle dressed weights ranged from 1.5-2.1 percent. In contrast, dressed weights in January saw year-over-year increases of around 3.2-5.3 percent. Lastly, changes in beef imports are limited and likely more complementary to existing beef supplies, as imports are often lean beef being blended for ground beef.
Long run supply fundamentals appear to be shifting. The industry is approaching a low in cattle inventory and will likely slowly (emphasis on slowly) build from here. The dynamics depend on the opportunity cost of retaining heifers, interest rates, pasture and range availability and conditions, future market expectations, and a host of other factors. Any rebuilding that does occur, even now, will take years to have its full effect.
On the demand side, data suggests the U.S. consumer still wants beef. BLS inflation data indicates that beef prices increased one percent month-over-month in September. Cutout values are also up again. Cutout values for the week-ending October 31 were the highest since mid-September.
While market participant psychology may have shifted over the last two weeks, the market fundamentals remain mostly the same. That’s not to say market behavior is unimportant. Clearly, it is for both futures and cash markets. However, the bigger picture remains relatively unchanged – tight supplies and strong demand are resulting in strong prices that are expected to continue until one of those starts to change in a material way. Given the dynamics of beef cattle supply and demand, those changes may take some time to develop.