Last autumn, $130 cash fed cattle and $200 Choice cutout looked like mere speed bumps on the way to record-high prices.
Since November 2011 Choice cutout made four previous assaults on the $200 level. It punched through in late May, then topped $210. The Choice surge was due in part to Old Man winter refusing to let loose his icy grip. That created pent up demand for grilling when weather finally improved.
Unfortunately, the $130 cash fed cattle barrier held. One reason is that by time the wholesale price surge came, cash fed cattle supplies were expected to begin rising seasonally. Forward-looking futures markets and to a lesser extent cash cattle markets saw weakness ahead. Current June fed cattle futures are trading $5 to $6 below the bulk of the most recent cash fed cattle trade.
Another reason is that analysts and retailers expect consumer pushback against high prices. A key signal will be consumer interest in buying beef after Memorial Day.
Grain farmers are familiar with the old market maxim that says the cure for high prices is high prices. High prices give users ample incentive to cut back. They do. Volume of grain moving falls. Prices drift lower. Corn is in what now looks like a typical short-crop, long-tail pattern.
Evidence is mounting that a similar phenomenon is occurring in beef. Some signs suggest trade chatter itself about high prices helps prevent higher prices.
Drought shriveling pastures and crops last year set the trade abuzz with talk of cattle herd liquidation. Combining super-tight beef supplies with higher cattle production costs had everyone projecting record-high fed cattle and wholesale beef prices.
Forward-looking markets adjust
Retailers took note. Neither retailers nor consumers like abrupt price hikes. Retailers began easing beef prices higher because "everybody" was "certain" that record-high prices lie just ahead.
Old-man winter refusing to lift his icy blanket made it easy to blame a delayed start to grilling season for failure of cattle prices to advance to new highs. However, well-publicized forecasts of record-high prices could just as easily be giving consumers incentives to look elsewhere for meat protein value.
Rising retail beef prices make pork, selling at relatively stable retail prices, look like a bargain. Still, retail pork prices are slow to retreat, even as faltering pork exports made more pork available to domestic consumers. The result, slipping wholesale pork prices and lower hog prices to producers. Those forces could stall pork expansion, which would be price friendly to beef.
A bigger pie is better
High retail beef prices relative to farm prices seem unfair to both front-end beef producers and consumers. However, as long as beef products keep moving through the supply chain, opportunities exist for more of that value to flow back to producers. From a business standpoint, equitably dividing a big retail revenue pie among those who create value is less challenging than being forced -- through price hikes, which can trigger consumer pushback -- to create a bigger pie to divide.
While cattle prices are falling short of expectations, all is not bleak. USDA calculates the annual average farmer's share of the consumer's retail beef dollar advanced from 42.5% in 2009, to 46.4% in 2010, to 49.9% in 2011 to 51.8% last year. It slipped back to 50.8% in April 2013.
Expectations for lower prices for 2013-crop feedstuffs improve margin prospects from the cost side.
Consumers do show some resistance to pricy beef, primarily by consuming more ground products. That's led to higher prices for ground products relative to steaks and other pricier cuts. Some consumers may view steaks as better value compared to ground products. Moving more steaks would help lift carcass value.
Broilers remain relatively cheap, even though some chicken parts are pricy. Consumers prefer beef. But tight budgets due to a relatively soft U.S. economy could keep some consumers choosing chicken.
Otte is the farm management editor for Farm Futures magazine. See www.FarmFutures.com.