Kay's Korner

Jul 3, 2014

Investing in the future

What a remarkable time to be in the cattle business. Old-timers must be shaking their heads in disbelief at the way calves and feeder cattle are trading. Even when I began covering the industry 28 years ago, I would not have believed the price of calves would by 2014 increase more than 3.5 times. On the other hand, the price of many other goods has probably increased by that much or more. So why not beef cattle?

The answer to that question was far from apparent in 1986, when calves averaged $61.10 per cwt. The industry was in the early stages of a long decline in beef demand. It took the introduction of the beef checkoff that year to halt that decline and then, from the mid-1990s, to rebuild demand.

The industry learned a painful lesson during the period, that it could not take for granted that Americans would automatically buy whatever the industry produced. The fat “police” attempted to convince everyone that beef was a deadly food. Never mind that these people were wrong. For more on this, I urge you to read Nina Teicholz’s New York Times bestseller, The Big Fat Surprise.

Despite being a staple of the diet, beef was under constant attack throughout the 1990s and even in the first decade of this century. Just think ABC News and its scurrilous attack on lean, finely textured beef. If it wasn’t beef itself that was the target, then the structure of the packing industry was. There were numerous studies over 20 years or more that examined the “power” of the major packers.

Not one of these studies (and one cost $6.4 million) ever discovered any evidence that packers manipulated the market or used their power to force live cattle lower. Yet there are still people out there, and sadly some in the cattle business, who still hold on to their anti-packer biases.

My response to those people is: look at today’s market, with prices for all classes of cattle at record levels.

Yet no one suggests that producers are colluding to raise prices. The reason for the prices is supply and demand. If you look at the cattle cycle going back 100 years, there’s a clear correlation between expansion and contraction of the cattle herd, and the price of cattle. Until the mid-1990s, the correlation was blurred by the fact that beef demand had declined for 20 years. Now the industry and producers are reaping the benefits of a perfect storm of a shrinking herd due to drought but strong demand.

It’s important to realize the record-breaking rally last month was only partly supply-induced. Strong demand throughout the month was the main driver. Beef sales, especially at retail, were better than anyone dared hope for. This allowed fed beef processors to pay more for live cattle, which allowed cattle feeders to pay more for replacement animals. That’s how the market works. Prices go up when demand exceeds supply, and vice versa.

All good things must come to an end, you say. Surely Americans at some point will stop buying the most expensive steaks in the grocery store and order a sirloin steak not a rib-eye at that white tablecloth restaurant. Don’t be so pessimistic. The economy is much stronger than most realize and Americans have more disposable income than in a decade or more. My contacts tell me that their customers are paying up because they love beef and have the money to buy the best if they want to.

One of the industry’s greatest tools is the Beef Checkoff. It has done a fantastic job helping to explain beef and make it relevant in the diet of a whole new generation, the Millennials. My three children are all in this group. They love beef but need all the help they can get in what cut to buy and how to prepare it.

Another of the industry’s strengths is that it has a wide variety of products to suit every purpose and wallet. That’s why ground beef in its many forms is the industry’s most important product. The Checkoff does a great job helping retailers and restaurateurs develop “value” cuts and beef dishes. It will need to keep doing this valuable work, as beef prices will remain at record high levels for consumers for several more years. Cattle producers will continue to get higher prices. Surely it is time to double the Beef Checkoff to $2 per head. Regard it as an investment in the industry’s future. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)