031245 Markets Adjust to Tight Beef Supplies

Washington, DC - Beef demand continued strong into 2003, particularly for higher quality fed beef. However, the beef sector has been forced to make adjustments throughout 2003. During winter through mid-spring adjustments stemmed from poor feeding conditions resulting in light slaughter weights and very tight supplies of higher quality beef. Although retail prices began a record path in February, fed and feeder cattle prices rose but remained below record levels. Discovery of bovine spongiform encephalopathy (BSE) in a single cow in Canada on May 20 resulted in a ban on imports of live ruminants (cattle, sheep, goats, deer, and elk) and ruminant products and byproducts from Canada. This tightened supplies even more and the industry reacted by marketing cattle out of feedlots ahead of schedule and, aided by large feedlot profits and dry conditions, placing more cattle on feed. Consequently, third-quarter steer and heifer slaughter rose 2.5%, but beef production was slightly below a year ago, due to sharply lower steer and heifer dressed slaughter weights. Production would have been lower but cow slaughter rose 5% due to drought and poor grazing conditions in many areas.

A sharp turn of events occurred in September, October, and November. Steer and heifer dressed slaughter weights were averaging over 30 pounds lower than a year ago, resulting in even tighter higher quality beef supplies. Three factors began to come together this fall to limit climbing fed beef prices from rising even more on tightening higher quality beef supplies. First, the movement to a record monthly price of $176.06, up 51% from a year earlier, for light Choice boxed beef in November resulted as supplies declined. This forced some end users to switch to other products. Second, there was some improvement in slaughter weights as weekly slaughter levels dropped from third-quarter and year-earlier levels as days on feed increased. Typically steer and heifer slaughter weights peak in October-November, but this year weights have been steady to declining since August. Third, on August 8, boneless beef from cattle under 30 months of age was allowed to reenter the U.S. market from Canada. After several weeks of adjustments to the new permit system, imports from Canada have been increasing. This combination of events, although taking some bloom off cattle/boxed beef prices, may help the industry preserve market share gained through the very strong consumer and export market that has evolved over the past few years. However, cyclical meat market share lost through tight supplies and high prices, typically is expensive to regain as cattle inventories and beef supplies expand. Supplies will tighten from present levels over the next couple of years as female stock are retained, but likely in mid-2006 beef supplies will again begin to rise with market share having to be regained.

Feedlots in December are less current and slaughter weights are likely to pick up from the summer lows. Boxed beef prices have declined from the mid-October peak near $194 a cwt to $155 to $160 a cwt in mid-December. Retail prices continue to rise, a situation likely to continue through early winter, as the live/wholesale/retail price spreads readjust to the rapid supply/price changes of 2003. The November retail price for Choice beef rose sharply averaging a record $4.32 a pound, up 10% from last month’s record, and up 29% from a year earlier. The retail and hotel/restaurant sectors absorbed a formidable share of the price increase through October with the wholesale to retail spread falling from $1.63 in July to $1.22 in October before a rapid pass through in November. The November wholesale to retail spread rose to $1.74 a pound. Although fed cattle and boxed beef prices are off their highs, they remain well above any previous highs and will remain in these ranges for the next couple of years as supplies tighten further. December averages are likely to remain 25% to 30% above a year earlier.

The beef complex will be challenged over the next couple of years to maintain supplies for the various sectors of the domestic and export market. Market share will be lost to pork and poultry as the next expansion phase of the cattle cycle begins and more cows and heifers are retained. The more the industry can moderate the adjustments to declining higher quality beef supplies over the next couple of years, the less downward price adjustment will be needed to buy back market share.

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