Beef markets adjust to increasing supplies
By: Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist
U.S. beef production is expected to increase 4 to 4.5 percent in 2016. This follows annual decreases of 5.7 percent in 2014 and 2.3 percent in 2015. A twelve month moving average of beef production reached a low in October of 2015…the lowest since May of 1994…and has been increasing since. In the first half of 2016, monthly beef production averaged 5.3 percent above year earlier levels. Beef production is expected to increase at least through 2018.
As beef production increases, beef prices are coming down from record levels at the wholesale and retail levels. Monthly average boxed beef prices peaked at $240.25/cwt. for Choice in May, 2015 and at $249.34/cwt. in April, 2015 for Select. In the first half of 2016, monthly Choice boxed beef prices averaged 12.6 percent below year earlier levels with Select boxed beef prices averaging 14.5 percent below 2015 levels. Choice retail beef price peaked in May, 2015 at $641.20/cwt. and the All Fresh beef retail price peaked at $614.70/cwt. in July, 2015. In the first six months of 2016, Choice retail beef prices averaged 4.1 percent below year ago levels while All Fresh retail beef prices were down 4.3 percent year over year.
Several factors explain why retail beef prices have adjusted less than wholesale beef prices. First is the long time lag in production. The dynamics of beef supply are complex and take time to move through all market levels. Thus, supply increases will pressure prices in cattle markets and wholesale markets well ahead of adjustments in retail markets. Secondly, changes in beef production do not translate directly into retail beef supplies. The domestic retail beef supply is up only 2.8 percent when production is adjusted for beef imports and exports. This is due primarily to decreased beef imports in 2016. Retail beef price adjustments also reflect the impact of competing pork and broiler supplies.
Cattle producers sometimes convey frustration that wholesale and retail beef prices adjust less and more slowly than cattle prices. At the current time, feeder cattle prices have adjusted the most with smaller adjustments for fed cattle, wholesale (boxed beef) prices and the least adjustment so far in retail prices. This means that margins at the wholesale and retail levels are wider now. It’s important to remember that beef industry margins are cyclical meaning that wholesale and retail prices also did not increase as much or as fast when tight supplies pushed cattle prices to record levels. The margins tend to average out over time.
Faster adjustments in retail beef prices would not be a good thing for the beef industry. Slowly adjusting retail beef prices in the face of growing beef supplies indicates stronger beef demand. Weaker beef demand would cause retail prices to adjust more and faster to move increased supplies through the market. Beef retailers adjust beef prices only when the market forces them to adjust. The fact that retail beef prices have adjusted slowly thus far, especially in the face of ample pork and poultry supplies, is a sign of strong beef demand. Retail beef prices are declining but continue to be near record levels relative to retail pork and broiler prices. Adjustments in wholesale and retail beef prices will continue in coming months as beef production continues to grow. Retail beef prices will fall, which does not mean that beef demand is worse. Beef consumption will increase, which does not mean that beef demand is better. However, retail beef prices that decline relatively slowly as supplies increase is a measure of strong beef demand.