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Beefonomics

Like other commodities, the laws of supply and demand go a long way in determining beef prices.

Ranchers are currently in the rebuilding phase of the cattle cycle, replenishing stock that has been declining for the last eight years. The normal 10- to 12-year cycle is now beginning, with herd increases projected over the next three or four years, a one- or two-year peak in inventory, then a slow four- to six-year decline. While cattle numbers are expected to grow until 2010, beef supplies usually lag about two years behind. 

“Beef production should increase 3 to 4 percent in the next year in the United States and 2 to 3 percent in Canada,” predicts Randy Block, executive VP of Cattle-Fax, a nonprofit market information organization for the cattle industry. “But I don’t expect a big fall off in prices—demand is still very high.”

In 2003-04, the United States was extremely short on beef as a result of the mad cow scare and subsequent ban on Canadian cattle, so prices reached record highs. “We got through that very tight period, but restaurateurs can feel confident that we won’t feel that pinch again for the next three to four years,” Block says. “Production will increase supply through the end of the decade.”

Nevertheless, the Economic Research Service of the USDA reports that higher quality beef supplies remain tight. The proportion of cattle grading “choice” or higher was about 2 percent lower in late 2005 compared to the same period a year earlier, and demand for this premium beef continues to rise.

Factors other than supply and demand impact beef prices, too. Drought, high feed costs, rising fuel prices and the slaughtering schedule all have an effect. But mad cow disease (BSE) has wreaked the most havoc on the import-export market recently. The Japanese imposed a ban on American beef in late 2003, then lifted it in late 2005, only to reinstate the ban in mid-January, 2006 when a small amount of backbone showed up in one shipment. BSE infects spinal cord tissue and the Japanese will not accept beef with bones. At press time, the new ban was still in place, although the USDA is working with Japan to re-open trade soon. Korea has not restored its ban.

Despite the current uncertainty, the cattle industry generally agrees that there will be a moderation in beef prices over the next few years.

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