Dissecting The Market
Byline: John Marsh
Prior to the discovery of bovine spongiform encephalopathy (BSE) in Washington state in December 2003, the U.S. beef industry had experienced record beef prices in the second half of 2003.
USDA and Livestock Marketing Information Center (LMIC) data show that beef price increases from October 2002 to October 2003 were:
600- to 650-lb. feeder steers rose from $85/cwt. to $107/cwt.
Fed choice steers, $65 to $102/cwt.
Boxed choice beef rose from $112 to $177/cwt.
Choice retail beef, $3.26 to $3.93/lb.
The single case of BSE in Canada (May 2003) was a catalyst for the 2003 beef price surges. The U.S. and the rest of the world closed off imports of Canadian live cattle and beef products (some of the latter was partially restored by the U.S. this fall).
The primary factors causing the price increases relate to economic fundamentals. These include decreased U.S. cattle inventories since 1996, increasing domestic beef demand since 1998 and decreases in total U.S. net beef imports (imports less exports including live cattle) since 1993.
Other factors causing the price advances were October-to-October decreases in slaughter cattle weights and increases in beef by-product values. Corn prices also decreased over this period, increasing the demand price of feeder cattle.
Producers assume the 2003 moratorium on Canadian live cattle and beef imports was primarily responsible for U.S. beef price increases.
A statistical model of demand and supply in the U.S. beef sector was used to measure several economic factors that caused the beef price increases. These included (along with their changes from October 2002 to October 2003):
domestic beef demand, up by 6%;
commercial cattle slaughter from domestic sources fell 5.5% and average slaughter cattle weights decreased 4%;
live cattle imports from Canada fell to zero, which reduced U.S. slaughter cattle supplies by 4.5% (the Canadian import share of U.S. slaughter cattle supplies);
net beef imports from Canada decreased 70%, and net beef imports from all other countries decreased 7%;
U.S. by-product values (hide and offal) increased 8%; and
corn price decreased 14%.
Table 1. Factors causing increases in 2003 U.S fed cattle prices
Results Of The Study
Table 1 gives the relative impacts of these economic factors on fed-cattle prices in percentage and dollar terms. Factors in the table are arranged in descending order of importance.
The leading factor in the cattle-price increase was the 5.5% decline in domestic cattle slaughter (U.S.-raised), which increased cattle price by $7.83/cwt. The second leading factor was cessation of Canadian live cattle imports, which increased cattle price by $6.42/cwt.
The Canadian effect was relatively large because it reduced total U.S. commercial cattle slaughter by 4.5%.
The strength of consumer beef demand since 1998 has been attributed to beef product promotion, beef product development (convenience foods), improved perception of beef health attributes and high protein diets (i.e., the Atkins diet). Improving beef demand was another leading cause of the 2003 price increase, which added $3/cwt. to fed-cattle price.
Declines in average slaughter weights due to acceleration of fed-cattle marketings was the fourth leading factor, increasing fed price by $2.04/cwt. The increase in the value of by-products added $1.67/cwt. to fed-cattle price, and is the fifth leading factor.
The last two factors were decreases in net beef imports from Canada and from other countries, which increased fed cattle price by 45cents/cwt. and 8cents/cwt., respectively. The small effect of these variables reflects two factors:
net beef imports from all countries constitute only about 4% of U.S. beef supplies, and
net beef imports more directly impact the wholesale-retail level of the market.
Prices in the feeder-cattle market logically followed price increases in the fed-cattle market. But, on a percentage basis, they didn’t increase as much as fed-cattle prices. This was due to small cattle-feeding margins in fourth quarter 2002 and uncertainty by cattle finishers about the permanency of high fed-cattle prices.
U.S. BSE Impacts
The study didn’t account for USDA’s Dec. 23 report of BSE. Within a few days of the announcement, cattle futures and cash prices for fed cattle fell by 15-20% – from about $92/cwt. to about $75/cwt.
As of late February 2004, cash fed prices in the Plains had settled between $75-$78/cwt. and boxed beef prices (cut-out values) had settled between $124-$127/cwt. Export markets had not opened but domestic consumer beef demand was still strong. The February 2004 live cattle prices were about equal to those experienced in June and July 2003. However, February 2004 box prices were about $10/cwt. less than those in the June-July 2003 period.
Prior to the U.S. BSE discovery, the analysis indicates 78% of the large increase from October 2002 to October 2003 fed-cattle prices was supply related. This included decreases in domestic cattle slaughter, Canadian cattle imports, net beef imports and average slaughter weights.
Increased consumer demand for beef accounted for 14% of the fed-price increase while increased by-product values accounted for 8% of the price increase.
Prior to the BSE announcement, market analysts had predicted 2-3 more years of high cattle prices, but not at peak pre-BSE levels (October 2003-early December 2003).
U.S. beef producers potentially face a more volatile future due to the uncertainty of additional BSE cases and safeguard protections. Disease problems with competing meats (i.e., bird flu in chickens) can also add to the uncertainty. Reopening the beef export markets could be good for another $6-$7/cwt., after allowing for the re-importation of Canadian live cattle.
Note that (as of late February 2004) the majority of price adjustments in the cattle futures markets pertained to the first half of 2004. Live cattle futures for the fourth quarter of 2004 were only slightly under what they were trading for in October-November of 2003.
John Marsh is a professor in the Department of Agricultural Economics and Economics at Montana State University-Bozeman. E-mail him at firstname.lastname@example.org.
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