Have you noticed the rise in beef prices lately? Or, should I say, ‘OMG – what’s going on with the price of beef?’
First, let’s understand the key components of how beef gets to market in an easily digestible way.
BEEF SUPPLY CHAIN
Cow-Calf Operators Our beef supply starts with these folks. These are the farmers or ranchers that keep cows to produce calves to sell. A mother cow’s gestation period is a little over 9 months. A newborn calf takes about another 12 months to reach 400-500 lbs. before they can be sold off to feeders. They make their money by selling off their calves, which the industry calls Feeder Cattle.
Feed Lots / Backgrounders These are companies that purchase the 400-500 lb. calves and feed them to harvest weight, typically 1,200 – 1,400 lbs. Feed lot operators use grain for feed. Backgrounders keep the animals on grass for feed. Grain fed animals take about 6 months to reach harvest weight. Grass fed animals can take up to 9 months to reach harvest weight. These feeders make their money selling animals, called Fed Cattle, to packing plants for harvest.
Future prices for both feeder cattle and fed cattle are traded as commodities on the Chicago Mercantile Exchange (CME). The future price of cattle is a reasonable indication where beef prices are headed.
Packing Plants The companies that purchase fed cattle at harvest weight typically between 18-24 months old, harvest them for beef production. The largest packing plants in the country are run by Cargill, Tyson, JBS and National Beef, who operate multiple plants across the country. These packers make their money selling the beef they harvest to further processors and distributors who bring their finished goods to market to the end users – retail stores and food service operators.
Adding it all up, it takes over two years for one animal to come to market. Each operator in the trail needs to make a profit to remain in business.
THE CATTLE CYCLE
The Cattle Cycle is the alternating expansion and contraction of the U.S. beef cattle supply. Under normal conditions, the cattle cycle is approximately a ten year period. During this time period, the supply of cattle will be alternatively expanded and reduced over several consecutive years, in response to changes in profitability by the cow-calf operators.
When cattle numbers are high, beef prices are lower, which precipitates several years of herd liquidation. As cattle numbers decline, beef prices begin to rise, prompting several years of herd building.
The herd building cycle is relatively long due to the length of time it takes a cow-calf operator to expand a cow herd by breeding more cattle between the cow’s 9 month gestation period and the subsequent 12 month period it takes for a calf to reach feeding weight. Ultimately, the cycle takes at least 3 years before an increase in beef production will be seen on the market.
The available supply of fed cattle had been declining since 2010 amidst a normal cattle cycle until the severe drought of 2011-2012 that disrupted everything.
Over 80% of the nation’s agricultural land was hit hard by severe drought. Seed crops used for feed dried up and prices of feed shot up. No crops meant no feed for livestock. Ranchers couldn’t fatten up their herds profitably, so they sold them for slaughter.
Beef production has dropped nearly 8% since then. Three years ago, meat packers processed an average of 620,000 cattle a week; today that number is in the low 500,000′s. The U.S. is the world’s top beef producer, and our nation’s cattle herd is currently at a 63 year low. Experts predict that it make as many as 8 years for U.S. agriculture to fully recover from the effects of the drought.
The economic laws of supply and demand largely determine what we pay for beef. Beef demand was up 1.7% in 2013 to the highest level since 2008. Overall beef demand is 7.4% higher than 15 years ago, which is a bigger increase than pork, chicken or turkey. Export demand for U.S. beef in 2013 was up 4.9% compared to the year before and was 24.2% greater than 15 years ago.
Beef prices have been on the rise since the drought, and especially so over the past six months. We’re just now feeling the real impact of the low cattle supply. Live cattle futures closed at an all time high in February at $150/cwt. – 16% higher than last year.
It is expected cow-calf producers will continue to build their herds as they are getting higher prices for their cattle this year. Feed lot operators, while benefiting from declining feed costs, are losing that benefit by paying higher prices for feeder cattle to keep up with demand. Consequently, packing plants are paying more for fed cattle and passing on the increased prices to consumers.
Ultimately, consumer demand will determine the future prices of beef. Retailers and restaurants will eventually need to pass on these increases and consumers will either accept them, or reject them by spending their dollars on lower cost alternatives. It remains to be seen how all of this will play out in real time, but it appears we will see high beef prices throughout 2014.
TIPS FOR RISING PRICES
In the midst of the drought, we posted a blog (October 2012) that is even more relevant today with strategies to battle the rising cost of beef: What’s Your Beef? | How to Combat the Rising Fallout Cost of Drought.
Chefs and restaurateurs should look for suppliers that are able to create customized solutions tailored to their specific cost management needs. Having a strong partnership with key suppliers who can demonstrate creativity and flexibility, is the best way to deal with rising beef prices.
Ironically, it was 30 years ago this past January, when Clara Pellar shot to rock star status when she queried, WHERE’S THE BEEF? Here’s the link.