Last month, I wrote about record-high beef prices as the Memorial Day weekend approached. My point in the article was that the true test for beef demand will be in buying activity and prices beyond that key weekend that marks the beginning of grilling season. So as July 4 approaches, it is not too difficult to be convinced that my question on markets has been answered.
The Choice cutout was record high and averaged nearly $3.94/lb. the last week of June. At the same time, grinding beef and trim prices rose sharply as consumers purchased more ground beef. Higher trim prices in the face of record high fed cattle weights would certainly be supported by solid consumer demand in this grilling season.
Though cattle numbers are down and will continue to drop even further as the number of heifers in the feedlot declines, demand is now the key driver. Without solid demand, reduced cattle numbers alone will not support record-high prices. We know this from experience.
From an analyst’s perspective, we generally look at the supply side of the equation for market analysis. Not that we have ignored demand, but market analysis is driven by numbers, so the focus has been on supply where we have USDA surveys and market reports. However, and while I risk being repetitive, I would strongly suggest the dynamics of the supply/demand equation have changed and had there not been a positive and significant shift in demand over the past 12 months, beef prices would not have continued to reach new record highs.
We will begin to see heifer retained from this year’s calf crop, but at a slower pace than in past cattle cycles. Not only has the structure of the cow-calf sector changed over the past few years, but cow-calf operations have become much more cautious about expanding herds. Today’s market creates both the opportunity, and the incentive is to pay down debt and create a solid financial statement as opposed to herd building. While I am positive about the market outlook with both strong and solid beef demand, the situation is never set in stone in this industry. Uncertainty and volatility are always present.
With little motivation to rapidly build herds, the supply side of the equation will be supportive of prices which in turn will put greater emphasis on beef demand. Consequently, market analysis must also put greater emphasis on the demand side of the equation for not only beef, but also pork and poultry.
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