Beef: High Prices Cure High Prices

Beef: High Prices Cure High Prices
Chris Hurt, Purdue Extension Agricultural Economist

The adage that the cure for high prices is “High Prices” sure looks right for the beef market this year. Todd Gleason has more with Purdue Extension Agricultural Economist Chris Hurt.

The price of beef cattle reached a record high…
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The price of beef cattle reached a record high of about $170 for a hundred pounds in late 2014 and early 2015. It has plummeted since, dropping 50 bucks. Interestingly, hogs took a similar nose dive from mid-last year to this year and it seems likely the price of eggs, which skyrocketed last spring because of Avian Influenza, is destined for the same fate. Or so thinks Purdue Extension Agricultural Economist Chris Hurt. He says it is all part of agriculture’s boom/bust cycle.

Hurt : …now seeking to better evaluate equilibrium.

Quote Summary - When analyst look back on these boom/bust price patterns, the supply and demand data never seem to fully justify how high prices go in a period of shortage, nor how quickly they fall afterward. The tendency for prices to “overshoot” on the upside and then to “undershoot” on the downside is repeated often. The excesses on the upside may be related to the human emotion that is inherent in agricultural markets when there is uncertainty with regard to food shortages. Regardless, cattle markets seemingly overshot to the upside, then undershot to the downside, and are now seeking to better evaluate equilibrium.

Certainly some of the roller coaster price action in the cattle markets can be explained by basic supply and demand relationships captured by the statement “the cure for high prices is high prices” says Chris Hurt. Here’s how that has happened in the beef market; with higher cattle weights, sharp increases in beef imports, declining beef exports, and by consumption shifts due to high retail beef prices.

Hurt : …as well as for supply of our industries.

Quote Summary - Retail beef prices probably have also contributed to the record drop in finished cattle prices this year. Retail beef prices rose to a high of $6.42 per pound in May (USDA). These record high prices sent signals to consumers to consider looking for beef substitutes and they found them in growing pork supplies at declining prices and abundant chicken at prices similar to those in the previous year. Again, given time, high prices provide a cure for high prices for demand as well as for supply.

After cattle prices have seemingly overshot and undershot, the market is now attempting to find the “correct” equilibrium. Of course that “correct” price is never known and one of the primary functions of markets is to discover it.

Hurt : … the highest cattle prices on this cycle are behind us.

Quote Summary - Using current futures prices as a forecast suggests a strong recovery will occur into the end of 2015 into the low $140s. Then, prices would be expected to reach their 2016 highs in late winter or very early spring in the mid-to-higher $140s. Seasonal weakness would drop prices back to the mid-to-higher $130 by the end of summer. Most likely, the highest cattle prices on this cycle are behind us.

Finished cattle averaged near $155 in 2014. They are expected to be near $150 for 2015 and then moderate even more into the high $130s or low $140s for 2016.

Meanwhile high prices are continuing to do their job of stimulating expansion of the cow herd, with female slaughter (heifers and cows) so far this year down ten percent. Indeed, given enough time thinks the Purdue agricultural economist, high prices will solve the dilemma of high prices.