Rabobank agricultural economist Don Close said that while the phrase is overused, in the case of the beef business it is perfectly accurate to describe events of the past four or five year as a “perfect storm” that led to the sharp climb in prices over the past several months.
“Clearly the combination of factors that we had through much of the fourth quarter – tight feedyard supplies, tight packer inventory, certainly tight retail inventory and then the day-to-day bombardment of [winter] weather than has further complicated our transportation system – have led to this price situation,” he said during the Cattle Industry Convention in Nashville.
The long-time market watcher said that given the uptick in price on more or less every front, it is likely that the industry has seen a near- or mid-term apex.
“Has the market over-responded short-term with the run to $140-$150/cwt, I think we’d have to say that it probably did,” he explained. “We’re seeing a correction now, and will likely see at least some temporary demand erosion that will cause ripples throughout the system.”
He clarified, however, that the recent correction in boxed beef values and likely “demand destruction” at the consumer level does not mean that the market will simply collapse any time soon. Rather, the question becomes how quickly will wholesale beef prices and cattle prices respond to stabilize that demand base.
If prices come back to a more moderate level in a relatively short time – between now and March, for example – he said the market can remain “pretty healthy.” If, however, the price response is more delayed and consumer pushback lasts into the traditional grilling season, then the issue becomes much more worrisome.
From a price outlook standpoint, Close said that means that the second quarter of 2014 is perhaps the hardest to forecast this year. Third quarter prices will likely reflect stabilization and recovery, and that fourth quarter prices will quite likely be in the $140/cwt level, though he cautioned that the high price for the year has probably already been set.
Close is one of 80 market analysts employed by Rabo AgriFinance around the world as part of the banking concern’s Food and Agribusiness Research and Advisory Group. Prior to the industry convention, he released a report analyzing how changing consumer preferences and a production model tailored to the production of top-shelf steaks have put the U.S. cattle industry in a position of losing market share to competitive proteins.
“Under the existing business model, the U.S. cattle industry manages all fed beef as if it were destined for the center of the plate at a white table cloth restaurant,” the economist said. “The industry is, essentially, producing an extraordinarily high-grade product for consumers who desire to purchase a commodity.”
That disconnect between the consumer of today and the current beef production system’s current slate of products is a long-term challenge for the industry.
“More than 60% of U.S. beef consumption is ground product,” Close said. “If the U.S. cattle industry continues to produce ground beef in a structure better suited to high-end cuts, the result will be continued erosion of market share.”
Listen In: Rabo AgriFinance beef economist Don Close discussed his analysis of the beef and cattle markets, as well as his recent report on consumer preferences and competing proteins, in an episode of the Feedstuffs In Focus podcast. Listen to the conversation here. The Feedstuffs In Focus podcast is sponsored by Kemin Industries.