A Crossroads For Beef

September 26, 2015 02:33 AM

Expansion of the U.S. cattle herd will test consumer demand

Market prices for your calves are headed lower. Over the next few years, annual fall prices for weaned calves will likely struggle to match those of the previous year, a trend typical of an expansion phase. It doesn’t necessarily mean the good times are over for ranchers, but analysts believe consumer beef demand will play an increasing role in the success of your operation.

“The U.S. beef industry is at a critical crossroads,” according to Glynn Tonsor and Ted Schroeder, Kansas State University agricultural economists. That’s the message they hope to underscore in a fact sheet they co-
authored, Beef Demand Prioritization.

“The recent historically-tight cattle and beef supplies are shifting as cow-calf producers expand the breeding herd,” they say. “The industry has enjoyed four consecutive years of aggregate beef demand growth. Combined, tight supplies and strong beef demand led to beef and cattle prices that many never envisioned possible.”

Last year’s historic prices—and this year’s precipitous decline—have led to the inevitable question: “What will beef demand look like in the coming years?”

While the U.S.’s expanding cattle herd will put more beef into the pipeline over the coming years, John Nalivka, president of Sterling Marketing, Vale, Ore., says most cow-calf operations will continue to find good profits in the near-term. He estimates average cash profits will be $606 per cow this year, with profits about $490 per cow next year. Profitability could dip to the $325 to $350 per cow range by 2017.

The beef industry was long overdue for expansion. 2014 began with the smallest herd in 60 years as a result of several years of drought and high grain prices. The tightening numbers left feedyards and packers scrambling for cattle, and prices became a runaway. Coupled with ample rainfall throughout the Central Plains, those higher prices provided the incentive for producers to expand their herd. Already, agricultural economists see signs of aggressive expansion. 

“The nation’s beef cow herd has started down the path of the largest expansion in 25 years,” explains Chris Hurt, economist, Purdue University. “The last major expansion was from 1990 to 1995 when the herd grew by 10%. The industry had started on a modest expansion in 2005 and 2006, but producers aborted that expansion cycle due to the Southern Plains drought and the start of the high feed price era late in 2006. Now, with pastures and grassland restored for most of the country and the feeling that feed prices will remain moderate, this expansion is off to a fast start.”

U.S. beef supplies were down about 6% in the last half of 2014 and about 4% in the first half of 2015, Hurt says. Beef supplies will likely show a small growth of 1% in the second half of this year and expand by a more significant 4% in 2016. Often overlooked during last year’s profit windfall was the fact consumers continued to buy beef even as retail prices reached record levels.

“The consumer has been willing to pay more for beef and pork than we thought they would,” Tonsor says. 
Consumers are spending a smaller percentage of their disposable income on red meat than they used to, he adds, but “the importance of demand will be clear over the next two to five years,” Tonsor says. “As supplies grow, prices will decline unless demand grows to more than offset supply-side pressure.” 

Beef’s recent track record, however, has been outstanding. Beef demand has increased in 17 of the past 20 quarters, dating back to mid-2010. More recently, the beef demand index during the first quarter of 2015 was 92.57, a 15% gain over the same quarter of 2014. Second quarter 2015 beef demand index was 88.48, a 5.2% increase over the same period last year. 

If demand continues to grow, Tonsor and Schroeder say relatively small reductions in cattle prices would occur “as expanding beef demand could absorb larger volumes without realizing substantial price declines from current levels.” Despite the recent success of beef demand, however, Tonsor and Schroeder are less optimistic for the near future.

“For a variety of reasons, we do not believe beef demand will grow sufficiently in the next few years to fully offset the expected rate of growing supplies,” they wrote in Beef Demand Prioritization. “In other words, we expect lower fed cattle and beef prices than recently observed. However, that does not suggest strategies designed to strengthen beef demand are not worthy investments. In fact, striving to grow demand as supplies increase is immensely important to industry profitability.”

That view meshes with the recommendations from the National Cattlemen’s Beef Association and the Cattlemen’s Beef Board’s Beef Industry Long Range Plan Task Force, which agreed the single most important strategic objective the industry should pursue is increasing beef demand. This summer, the 16-member task force established a specific objective to “increase the wholesale beef demand index by 2% annually over the next five years.” 

In their report, Tonsor and Schroeder listed five “key areas for the industry to use in prioritizing efforts focused on beef demand:” 

1. Support expanded information regarding demand concepts

2. Assess international demand prospects and identify target countries/regions

3. Assess implications of changes in composition of U.S. households

4. Improve perceived food safety and product quality profile of U.S. beef

5. Assess determinants of recent demand strength.

Beef demand has increased in 17 of the past 20 quarters compared to the prior year. Additional information can be found at www.agmanager.info.

Strategies To Increase Beef Demand

Increasing beef demand is the single most important strategic objective for the U.S. beef industry, according to the Beef Industry Long Range Plan Task Force. Meeting the objective of increasing the wholesale beef demand index by 2% annually will require resources be committed in four core strategies: 

  • Drive growth in beef exports, a strategy that focuses on gaining access to key markets and promoting the unique attributes of U.S. beef to foreign consumers.
  • Protect and enhance the business and political climate for beef, which begins with motivating stakeholders to become more engaged in policy concerns to improve the industry’s effectiveness in managing political and regulatory issues that threaten the overall business climate of beef production, including assuring beef’s inclusion in dietary recommendations, exploration of new production technologies, crisis management planning, developing the next generation of beef industry stakeholders and other initiatives.
  • Grow consumer trust in beef and beef production, including a critical focus on antibiotic stewardship, the implementation of a certification/verification program and continued investment in beef safety initiatives. The task force said the entire beef community must be engaged and collaborate with a broad group of industry partners to protect beef’s image.
  • Promote and strengthen beef’s value proposition, a strategy designed to revolutionize beef marketing and merchandising; invest in research that allows the industry to communicate beef’s nutritional benefits; capitalize on media technologies to communicate beef’s value proposition; and respond to consumer-based market signals with product improvements and increased production efficiencies.

 “Recognizing the growing demand among the world’s middle class for high-quality protein, we want the U.S. beef industry to responsibly produce the most trusted and preferred protein in the world,” says John Butler, CEO. “At this pivotal point in the U.S. beef industry’s history, we need to focus our energies and limited resources on those areas that can provide our industry the best results.”

Back to news



Spell Check

No comments have been posted to this News Article