Is beef a luxury item?

Published on: 14:32PM Jan 24, 2014

Hello Pro Farmer Members!

Let's talk cattle. Frankly, the cattle market feels a little like in felt when corn futures crossed psychological resistance at the $8.00 level in the summer of 2012. It kind of makes you sit back and ask yourself, "Is this really good for anybody?"

Well, there's a difference between beef and corn. When the corn market rallies, it is trying to reallocate remaining bushels to the end users that want it most. The realization of this hit me hardest in the 1995-96 marketing year when corn futures rallied to about $5.50 and the cash market kept on pushing into the $7.00 range. And then, ADM shut down an ethanol plant and moved the bushels the plant owned into the feed pipeline. Cattle, hog, poultry and dairy guys wanted that corn more than ADM wanted it to make ethanol. And anyway... there wasn't much of an ethanol market in place at that time. It made sense that corn would move from ethanol into feed channels. And when supplies started to move between end users, that was the end of the corn rally.

In the summer of 2012, similar happenings took place. The market topped well ahead of full-force harvest (although some corn was being harvested when the high was hit) and it topped because remaining corn supplies were being reallocated among the end users.

Cattle - and specifically beef - are different. The market isn't trying to reallocate existing supplies to the end users that want it most. Beef is beef - it is the end-use product. The job of a meat market is to balance supply with demand, right? If beef becomes too expensive for lower-income consumers (or consumers that simply won't pay "that much" for beef), then more beef is left for higher-income consumers who can (and will) continue to buy available supplies. So in a way, corn is like beef. The high price is designed to limit demand from one group (lower-income consumers) to leave more for another group (higher-income consumers).

"Steak is the new lobster."

Jason Britt is the President of Central States Commodities, Inc., in Kansas City, Missouri. I met him face to face at the Commodity Classic either last year or the year before and I follow him on Twitter. His tweets range from highly entertaining to stubbornly bullish to exceptionally informative to gloom-and-doom to intently insightful. In other words, you never quite know what you're going to get from an @JasonlBritt tweet, but they're always worth reading.

He sent two of his insightful tweets on Jan. 22.

1. "Steak, the new lobster."

2. "I like lobster a lot. But sure don't eat it very often."

It's pretty clear what Jason is saying. Steaks on menus at even mid-class eating establishments now carry a price tag of "Market." In the meat case, record retail prices will climb even higher when the record-priced boxed beef that traded this week works through the system. When it does, lower-income consumers may be opting for pork or poultry. And many will be looking to stretch their beef-buying dollars by picking up a $1 can of spaghetti sauce or an 88-cent box of Hamburger Helper so they can feed their families more with less beef.

And even higher-income consumers will likely balk at steak prices when they see them this time next week. It'll be enough of a shock to either back-away completely or to reduce portions on the plate.

Beef has been working on becoming a luxury food item for some time, and that process has accelerated in 2014. That doesn't mean lower-income families won't keep buying beef... they'll just buy less and won't be as quick to throw a couple of ribeyes in the cart when they do have something to celebrate with a nice meal.

Come to think of it... what's happening in the propane and natural gas markets right now is more similar to what's happening in beef. Higher heating bills and restrictions on how much suppliers will deliver are incentive to users (and especially lower-income users) to turn down the thermostat and to throw on a sweatshirt and heavy socks. The price rise is an effort to slow down use (to balance supply with demand) and the delivery restrictions are simply an effort to leave more for everybody.

Now... here's a big difference between corn and beef (or corn and propane): The role of high corn prices is two-fold - to slow demand and reallocate supplies to other end users. The role of high beef (or propane) prices is to lower demand. Yes, some will feel the pinch of higher beef prices sooner than others, but the ultimate goal - because there is a constant new supply of beef (and propane) coming to the market - is to balance supply with demand. Corn doesn't have a constant supply coming to the market... what's there is there until a new crop is harvested. That's why a high corn price has two jobs to do, a high beef price has just one.

Longer-term, high beef prices do have a second job. That's to provide enough economic incentive to a new generation of cow-calf producers to put up fences, seed down some pasture and hay and to reclaim some of the acres lost to row-crop production since 2007. That's a tough job... and a job that will take a long time to complete.

That's it for now...

... I'm headed for Canada for three days next week. Wish me luck! And I'll be in Chicago at the Top Producer Seminar on Thursday... I hope to see you there!

Follow me on Twitter at @ChipFlory

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