Chuck Jolley   |   Updated: February 3, 2012

Last Saturday the Des Moines Register reported the “combination of drought and heat in the Southwest accelerated what was already a tight supply of cattle in the U.S. last year, dropping the total herd to 90.8 million animals, the lowest total since 1952, the U.S. Department of Agriculture said Friday.”

‘Since 1952?’  Some perspective, please.  1952 was 60 years ago, representing three generations of Americans.  Checking in with census data, our population in 1950 was 151,325,798.  Sixty years later, the head count of the human herd in these 50 states was 308,745,538.  We humans have more than doubled while our cattle count regressed. 

So what does that mean to cattlemen? Supermarket beef prices rose by 11.5% last year, according to the U.S. Department of Labor, a staggering number in any economy but possibly deadly when so many Americans are struggling to put food on the table.  Ground beef, the most price-sensitive product in the meat case, was up 23% last year, driven by the demand caused by consumers trading down from whole muscle cuts.  The downstream stampede helped more expensive choice cuts to see a lesser price rise.  Boneless roasts were up 10-12%; sirloin steak barely moved, up just 1%.

Kevin Penner, cattle trader at Ag Trader Talk in Des Moines, told the Register, “Consumers most likely will continue to see high beef prices through the summer grilling season. The report was about what the trade expected.”

Faced with a significant price increase of their staple product and a desire to protect market share, McDonald’s raised its retail prices just twice during 2011, neither time did they ask for enough to cover their increased costs.  Other fast fooders followed similar strategies.

On Tuesday, John Maday, Managing Editor, Drovers/CattleNetwork reported the story had expanded from publications that normally carry ag news to the popular press. 

“Now even the national consumer media has taken notice as USA Today ran an article this week documenting the decline in U.S. beef herds and resulting inflation in beef prices,” he wrote.

Maday had some concerns about inflationary pressures. “Continued inflation in retail beef prices, however, eventually could threaten domestic and international demand for U.S. beef, resulting in lost market share to other proteins or other beef exporters.”

Writing for Meat&Poultry, Cattle Buyer’s Weekly Publisher Steve Kay said, “Wendy’s International introduced its famous ‘Where’s the beef?’ slogan in 1984. The often-used phrase might turn out to be the catch-cry in the 2012 US red-meat complex because available beef supplies are set to fall this year to 54.1 lbs. per person . . . down 3.3 lbs. from 2011’s expected 57.4 lbs. and 2010’s 59.6 lbs. It would be the lowest per capita or disappearance figure in at least 61 years.”

Anyone involved in product marketing knows a downward spiral in consumption of anything – food, electronics, hard goods – is difficult to turn around.  The longer the spiral descends, the harder it is to recapture lost market share.

To help answer some troubling questions about the future of the cattle business, I though posing a few questions to John Nalivka might be in order.  He’s got the right credentials; President and Owner of Sterling Marketing, Inc., an Agricultural Economic Research and Advisory firm located in Vale, Oregon, he has a B.S. degree in Animal Science from the University of Idaho and an M.S. degree in Agricultural and Resource Economics from the University of Nevada at Reno.

He joined Sterling Marketing in 1991 to develop an economic advisory service for the livestock and red meat industries. He purchased the firm in 1994. In addition to supplying ongoing market information services, Nalivka’s firm has completed extensive research projects in topics concerning the livestock and red meat industries as well as research concerning the economics of agricultural resources over the past 27 years. He’s a principal partner in Land and Livestock Advisory Service LLC, a ranch resource management and advisory firm and Sterling Solutions, LLC, an affiliate to Sterling Marketing, Inc. formed to provide source verification and traceability for the beef industry.

With that background, I thought he could put some perspective on what’s going on in the cattle business and where it’s headed.

Q. Earlier this week, USA Today reported “Low cattle supplies in 2012 are expected to drive up beef prices for the second year in a row, stretching consumers still coping with high unemployment and only modest wage increases.” First, let’s talk about the reasons behind the decreasing herd size. The great Southwest drought? Rising feed costs? What’s going on here?

A. Liquidation of U.S. cattle herds was slowing and the cattle inventory was probably beginning to stabilize as we entered 2011. However, the severe drought in the southern tier of the U.S. last year led to further herd liquidation and consequently, cattle numbers were reduced another 2% to the current 60-year low inventory that USDA reported last week. Rising grain prices coupled with uncertainty about the U.S. and global economies, I think, further frustrated the situation.

Q. U.S.M.E.F. has done a great job in regaining markets lost after the Washington mad cow scare a little over 8 years ago. What has that done to the domestic beef supply?

A. U.S. beef exports will be up about 21% from a year earlier during 2011 and accounted for about 11% of U.S. commercial beef production. So, obviously that takes 11% of potential domestic supply out of the country. If we didn't have that export market, I feel pretty confident that prices would not have been nearly as strong as they were during 2011. Demand is comprised of both domestic consumption and exports and it takes both to support beef prices and ultimately cattle prices.

Q. Low supply has pushed retail beef prices to near record levels. Prices are predicted to rise 4% to 5% this year following last year’s 10% increase in 2011. You were quoted in the newspaper article as saying prices could rise as much as another 10% — more than double the inflation rate for all food. Given the current economy, what could a price rise of that size do to demand?

A. Actually, Chuck, I was somewhat misquoted in that article as I was referring to wholesale beef prices rising 10%. I think retail beef prices will be up 5 to 10% and I base that on packer losses. Price advances through the supply chain were not equal last year or at least in the second half of the year. Live cattle and retail prices rose much more than the cutout or wholesale prices. Consequently, producers, feeders, and retailers did quite well while packer margins turned quite negative by September once the drop credit lost value and the cutout was not high enough to support slaughter cattle prices.

Something has to change. Packers are pushing a string. And feedlot break evens are in the upper $1.20s to mid 1.30s. So, either steer prices have to come down or the cutout has to go up, and I don't think retailers will be inclined to raise wholesale beef bids without raising the price of beef in the meat counter. And, it will probably take a 10% increase! Against 2011 Choice beef, that would put the average for 2012 at about $5.30. I don't think that is too much to ask.

Q. Quickly rising prices generally mean a scramble to increase supply. Are the conditions in place for this to happen?

A. I do think we are now stabilizing the beef herd as indicated by heifer retention. But, I don't think that expansion will be very rapid and once again, production efficiencies will be notable. We have the same herd size as 1952, but we produce 3 times as much beef today as we did then. At the margin, it simply does not take much of an increase in cattle numbers to substantially increase beef production. The same is true for all of U.S. agriculture whether it be the hog industry, poultry, dairy or grains.

Producers face higher costs of production and are pretty cautious. If we have another drought or prices fall substantially, the entire economic picture changes. I am fairly optimistic this year, but I think the situation is quite tenuous and I don't think anyone should throw caution to the wind.

Q. How will a continuation of rising prices affect demand? Will consumers continue to trade down or switch to other protein resources?

A. I think consumers are generally eating smaller portion sizes anyway and they also have high expectations for quality, consistency, food safety, and convenience. I don't think they will necessarily walk away from beef solely because of price, but if quality isn't there or food safety becomes a concern along with higher prices, the industry is in trouble. The industry cannot ignore consumers. It is a constant job of sales and marketing.

My biggest concern in 2012, and more so than in 2011, is that markets across the supply chain must be fairly well aligned and that is not the case right now in this environment of tight supplies, which will become even tighter as producer hold more heifers to expand herds. Packer will need to balance capacity with supply. We have too much packing capacity and feedlot capacity, and that has to be rationalized.

Chuck Jolley is a free lance writer, based in Kansas City, who covers a wide range of ag industry topics for Vance Publishing.

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