The beef industry is experiencing a wide range of emotions at the current time. The level of excitement is obvious as cattle and beef prices have pushed even beyond record levels of earlier this year. Cattle prices are at values unimaginable just a few years ago. Higher cost of production and reduced herd sizes notwithstanding, many cow-calf producers will experience record returns in 2014. Coupled with the excitement, however, is a certain level of disbelief of current price levels. There is almost a “pinch me to see if I’m awake” feeling among many cattle producers. Though producers have been expecting strong prices as a result of declining cattle inventories and reduced beef production, the recent meteoric rise in cattle and beef prices is even beyond what only a few imagined and none would predict.
Coupled with disbelief is a growing level of skepticism, especially regarding beef demand. The most common question I get from producers is “when do we price ourselves out of the market?” or “when do people stop eating beef?” It’s almost as if we have no confidence in our product or our consumers. There are a multitude of beef products and some adjust more than others but it is becoming more apparent that many beef products are less price-sensitive than we might have imagined. Beef wholesale prices have pushed sharply higher the past month and the impacts will be felt in retail prices in the coming weeks. It takes time for retail markets to fully adjust and, while wholesale prices may cycle lower again after Independence Day, general upward pressure on wholesale and retail prices will continue for many months. Pork prices, partly due to impacts of the Porcine Epidemic Diarrhea virus (PEDv), and poultry prices have also increased. How those industries respond in coming months will be important. Certainly we are challenging beef demand in a manner unlike ever before and we must be sensitive to how retailers and consumers respond to rising price levels but both domestic and international beef demand are proving to be quite robust so far.
Disbelief and skepticism lead, understandably, to a certain level of caution in the industry. Among some producers (and lenders) there is caution, directed, not so much to the current price levels, but for how long we may experience them. There is a feeling that whatever is happening now, it cannot last. The wisdom of the old adage that “the best cure for high prices is high prices” should not be forgotten and will likely be true at some point in the future of the beef industry. The cattle cycle may have been deeply masked in recent years but it still exists and will be evident at some point. In the meantime, the multitude of factors that have masked the cattle cycle and extended herd liquidation for several years have left cattle inventories so limited that herd rebuilding and recovery of beef production will take several years. The cyclical response of the industry that will lead to lower prices cannot happen much before the end of the decade. Along the way, the industry is still subject to a host of potential external shocks and that, along with increased values in the industry, mean that financial and market risk is still an important consideration. Production and marketing plans should certainly include appropriate risk management components.