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Derrell Peel Explores the Important Role of Expectations in the Beef Industry

Mon, 17 Mar 2014 10:39:04 CDT

Derrell Peel Explores the Important Role of Expectations in the Beef Industry
Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist, writes in the latest Cow-Calf newsletter:

Cattle and beef prices are at record levels in every industry sector, from cow-calf to retail beef prices. These record prices are obviously supported by a very unusual set of supply and demand circumstances. So far in 2014, markets- especially fed cattle and wholesale beef markets-have displayed unprecedented volatility as industry participants try to sort out these unusual market fundamentals in a very dynamic market environment. Both producers and consumers are reacting, not only to current record prices, but also to their evolving expectations for market conditions over the coming weeks, months and years.

Much attention is focused on the low cow herd inventory and the need to rebuild. After many years of liquidation, the result of a variety of factors impacting the beef industry, the current situation reminds us that it is the cow-calf sector that is primarily responsible for supply in the beef industry. Until cow-calf producers can and will expand the cow herd, the industry's ability to maintain beef production will be limited. Cow-calf producers make decisions about herd rebuilding by considering, not only current price levels, but also their expectations about how high prices will go and how long they will persist. The cattle industry has a long history of production and price cycles so producers recognize that high prices now will likely lead to lower prices at some point in the future-it's the old adage that the best cure for high prices is high prices.   

However, the current situation is one of excess liquidation due to external factors that have taken cattle inventories to a much lower level than would have otherwise happened. The beef cow herd was poised to begin expansion in early 2011, prior to the last three years of drought. The beef cow herd then was some 1.8 million head larger than today. Moreover, the last cyclical expansion began in 2004 with a beef cow herd of 32.5 million head, with some 3.49 million more beef cows than today. That expansion was brief and truncated by feed and input market shocks; recession; and drought that contributed to the subsequent liquidation since 2007. The path to the current herd level was long and the recovery will similarly take several years which should factor into producer expectations for most of the rest of the decade.

Demand is also affected by consumer expectations. There is considerable industry concern about how beef demand will react to the growing pressure for higher wholesale and retail beef prices. So far it appears that beef demand is holding up well. Pork supplies are dropping now as a result of the PED virus and higher pork prices ahead will help support higher beef prices. However, abundant broiler supplies and relatively cheap poultry prices have, somewhat surprisingly, led to little substitution of chicken for beef so far. Consumers may be reacting differently to higher beef prices, in part, because of the expectations they have for the future. Considerable media attention has been drawn to the fact that beef prices will likely be high for an extended period of time. If consumers believed high beef prices were a short term impact, they would very likely avoid the high prices and substitute away from beef. However, the prospects for high prices for an extended period of time may be causing consumers to have more of a "get it while you can before the price goes even higher" attitude. Consumer preferences do not change easily or quickly. Consumers resigned to higher beef prices will make some adjustments but will continue to purchase beef.



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