Economist: Cattle Prices Predicted to Increase in Time

April 20, 2009 07:00 PM
Cattle prices are likely to increase over time, said Chris Hurt, Purdue University Extension marketing specialist.  

"The magnitude of price improvement may be robust at some point in 2010 as beef cow numbers continue to drop, beef exports continue to improve, and the world economy begins to heal," Hurt said. "A return to finished cattle prices of $1 per pound or higher seems probable as per capita beef supplies will be low and competitive meat supplies will drop as well."  

Current Price Pressure However, for the present Hurt noted that as much of the agricultural sector is taking a big hit from the recessionary economy, the beef sector is no exception.  

"Weak retail demand has lowered finished cattle prices," he noted. "The magnitude of the hit is hard to measure precisely, but consider that late last summer the price outlook for the first quarter of 2009 was for finished steers to average about $94 per hundredweight.  

"As the economy weakened, cattle prices fell and only averaged $81.50 in the January to March quarter. A reduced price of $12.50 per hundredweight represents a revenue reduction of $750 million in the first quarter alone."  

Cattle prices have paralleled the decline, and more recent recovery, in the U.S. stock market, he added. Since September, the Dow Jones Industrial Average index and finished cattle prices have been nearly 90% correlated using weekly data.  

"Of course, the stock market does not determine cattle prices, but since last September they have both been highly influenced by macro economic conditions that reflect weak demand," said Hurt.  

Hurt stated that supply is not the reason for low cattle prices. In the first quarter of the year, per capita beef supplies were down about 3%, and gave rise last summer to the anticipation of mid-$90s finished cattle prices in the first quarter.  

"Beef supplies will remain about 3% below previous year levels into the second quarter of 2009, but will be up about 2% in the third quarter and unchanged in the final quarter of the year," he said. "A smaller beef cow herd and fewer cattle in feedlots have provided generally smaller beef supplies."  

Additional Concerns Another concern for the cattle industry is that retail beef prices have been slower to drop than have producer prices.  

As an example, in the first quarter of 2009, retail beef prices averaged $4.33 per pound compared to $4.16 a year earlier. In contrast, Nebraska finished steer prices were about $81.50 in the first quarter this year compared to $89.60 a year earlier.  

"So while live cattle prices were down $8.10 per hundredweight, consumers had to pay 17 cents per pound more for beef," said Hurt. "This means beef processing margins increased, with the largest portion coming in retailer margins which were 13% higher than in early 2008."  

The pattern of farm-level prices changing more rapidly than retail prices is normal, and there are signs that retail prices and margins are on the decline. Retail beef prices peaked at $4.53 per pound last August and fell to $4.30 in March.  

"Retail margins have also been narrowing in recent months," he said. "These are both indicators that retail beef prices can moderate further and enable producers to receive a larger portion of the consumer beef expenditures in coming months.  

"The direction of the general economy, however, remains the key variable for the direction of finished cattle prices for the rest of this year and next. Feeder cattle and calf prices will also be influenced by the direction of feed prices and by pasture availability."  

While the beef production sector has suffered one of the most dramatic negative impacts from the general economy, it also has the potential to have one of the most dramatic positive responses when the world returns to economic normality, he noted.  

"The question, as always in markets, is when will the turn to higher prices get convincingly under way?" said Hurt.        

 This news release was written by Bob Sampson as a service of the University of Illinois College of Agricultural, Consumer and Environmental Sciences.  

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