This past fall produced the intersection of several factors that added up to one of the more profitable periods beef producers have ever seen. The spike in beef prices shocked industry experts and producers alike. Some say the rise of beef prices was just as unexpected, although much more welcome, as the pork market collapse in 1998 and 1999. There was no one factor responsible, but several things culminated in the beef price spike.

First on the list were tight beef supplies, initiated by last year’s weak profitability and compounded by the Canadian border closing in response to this spring’s bovine spongiform encephalopathy case.

By late October, cattle slaughter was down 11 percent from the same time in 2002. Meanwhile, weights also dropped 3 percent to 4 percent. So, by late October, total beef supplies fell about 15 percent from 2002 levels, points out Glenn Grimes, University of Missouri agricultural economist.

Another contributing factor to the price strength was a wide spread between choice and select grade beef. The select/choice spread was as high as $0.34 per pound, before falling back into the low $0.20’s in late October. Historically there is a $0.05 to $0.10 spread.

“The wide spread means retail prices haven’t reflected the high cattle prices. Most of the beef in retail stores is select,” says Grimes. “Foodservice takes most of the choice and higher grade beef; and foodservice is not as sensitive to the beef price fluctuations.”

A third factor is substantial growth in demand, which shows no signs of slowing down, says Dave Weaber, Cattle-Fax economist. Beef demand has been on the upswing for about three years, and the current situation is an extension of that demand.

“The rise in beef demand has been driven by an increase in consumer dollars, improved consumer perception, nutritional education, the Atkins and other high-protein diets, as well as new products and convenience-based products,” says Weaber.

In 2002, there were 499 new beef products introduced. If 10 percent of those survived, that’s still a pretty good increase, says Weaber. In 1997, only 70 new beef products were introduced. From 1999 to 2002, more than 1,500 new beef products have surfaced.

However, new products aren’t the only thing driving beef demand, exports also remain strong.

“Exports – up 7.6 percent from last year – are on pace to set a new record,” says Weaber. “The Japanese market made a nice recovery, increasing 17 percent; the Canadian market is up about 9.5 percent, due to the BSE case; and the Mexican market also increased slightly.”

Imports have dropped by 2.4 percent, again likely due to Canada’s BSE case. Distributors have been pulling beef out of cold storage to meet demand.

All these factors have merged to push fed-cattle prices as high as $120 per hundredweight, which is an all-time record.

“I anticipate fed-cattle prices will start to moderate,” says Weaber. “I think they’ll stay in the $90-per-hundredweight range for the rest of this year. Choice wholesale boxed beef should stay around $170 per hundredweight.”

Weaber expects fed cattle prices in 2004 to average $84 to $86 per hundredweight, with the top in the high-to-mid-$90 range and the low around the mid-$70s. Weaber bases his projections on production of 26.2 billion pounds of beef in 2004, which would be down about 1.4 percent from 2003 levels.

Grimes expects fed-cattle prices to be $80 to $90 per hundredweight through 2004, depending on what happens with Canada. In early November, USDA proposed a rule that would allow Canada to export certain live-ruminant and ruminant products, following a 60-day comment
period. Grimes says it will be next spring before Canadian beef exports to the United States return to normal.

Historically, high cattle prices typically would push up retail beef prices, which would make pork a more popular choice with consumers. That effect may have been hampered this time because retail beef prices haven’t risen.

Retail pork prices rose from August to September, so pork may be getting some help from beef, notes Grimes. For the first 9 months of 2003, retail pork prices were down 1.2 percent, but pork’s weak demand played a role in that decline as well.

“Consumer demand for pork is down, but live-hog demand has increased,” says Grimes. “That makes me question how much help pork is getting from beef. The increase in live-hog prices has come from squeezing the processor-to-retailer margins.”

The relationship between beef and pork has been waning, giving way to a substantially stronger cross-demand relationship between pork and poultry. (See the November 2003 Cause/Effect column.)

“You can’t rule out the pork industry’s efforts,” says Grimes. “The Other White Meat campaign has created a much more significant relationship with poultry.”