It’s fascinating how supply and demand fundamentals are working so well in the U. S. cattle/beef complex even though the federal government believes something is still seriously wrong with the market.
Cattle feeders enjoyed a contra-seasonal rally in live cattle prices in July and again in mid- August. As I write this, it appears prices will remain strong into the fall. Analysts are forecasting that prices, which averaged $94-$95 per cwt on August 11, could go as high as $98. Meanwhile, prices for calves and yearlings were up 12 to 16 per cent the first week of August. They look to go even higher because of sharply declining cattle supplies. Analysts are forecasting that the U. S. herd total could slide to 92 million head by January 1, 2011, down from 93.7 million on January 1 this year.
The live cattle rally began shortly after USDA published its proposed rule on livestock and poultry-marketing practices. I wonder what its authors made of the rally. Nothing, I imagine, because the rule ignores the way the market works and the fact that the marketing system for live cattle has changed significantly in the last 20 years. So has the way packers sell beef. Formula-priced sales have replaced spot market sales as the main way beef is sold, and now exceed 40 per cent of all weekly sales.
This would not have been possible but for marketing arrangements, which the rule threatens to undermine. They help provide packers with a guaranteed supply of cattle to offer their customers a guaranteed supply of beef. They also help packers supply beef to the strict specifications of dozens of branded beef programs. It’s startling that USDA’s rule makes no connection between the way cattle are bought and sold and the way beef is. I can’t imagine USDA made the connection at its livestock competition workshop with the Justice Department on August 27.
The shrinking U. S. herd means total available beef supplies will continue to decline. These supplies include domestic production plus imports minus exports. U. S. exports are up more than 25 per cent so far this year on last year. Imports the first half of 2010 were down 10 per cent on last year. They will grow the rest of the year and next year but will not make up the hole caused by smaller production and more exports.
This is good and bad news for the industry. The smaller supplies will help boost wholesale beef and cattle prices. But it will force per capita beef consumption to keep falling. USDA forecasts consumption to be 59.1 pounds per person in 2010 and 58.1 pounds in 2011, versus 61.1 pounds in 2009. Chicken will increasingly fill the protein hole simply because of availability.
Retail and foodservice beef buyers will use even more formula sales to ensure an adequate supply of U. S. beef for their customers. Packers will use even more marketing arrangements to ensure adequate supplies of cattle. All this will benefit producers because there will be even more demand for cattle.
Despite this, USDA and those who support its rule still believe that packers not market fundamentals determine cattle prices. My message is: when supply and demand are in balance, a healthy market ensues. That’s what has occurred this year and will occur in 2011. The national herd on January 1 next year is likely to be the smallest in 59 years. Meanwhile, domestic beef demand is recovering and exports are booming. Industry leaders recognize that the industry is in danger of missing out on the continued global growth in beef consumption. It would be tragic if the battle over USDA’s rule obscures such a positive outlook.
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USDA and those who support its rule still believe that packers not market fundamentals determine cattle prices. My message is: when supply and demand are in balance, a healthy market ensues