Wednesday, August 03, 2016

Beef Prices Come Down As Supply Increases

See Reversal of fortune in cattle country by Lynn Brezosky of the San Antonio Express-News. It seems like high prices in recent years have given ranchers an incentive to increase the size of their herds.

This did not happen over night as the article mentions "it takes roughly three years from the time a heifer is born until her future calf is ready for market." But this is what we discuss in principles of microeconomics on the topic of perfect competition. If firms are making above normal profits that causes supply to increase or shift to the right. So in the long-run prices will fall.

"Cattle raisers who thought historically high beef prices would stay around for a while have had a rude awakening, as the rush to rebuild herds following years of drought outpaced a market marred by still-sticker shocked U.S. and foreign consumers.

“We just have a whole lot more cattle,” Duane Lenz, an analyst with Denver-based CattleFax, told about 1,800 ranchers gathered for this week’s Texas A&M Beef Cattle Short Course in College Station on Monday, a continuing education and networking opportunity for ranchers.

Cattle prices that had soared above $1.75 per pound in 2014 started what has been a prolonged dive during the second half of 2015, selling as low as $1.17 last week."

"Exports are down because the strong U.S. dollar has made beef prohibitively expensive for many foreign consumers. At the same time, Australian cattlemen flooded U.S. grocery stores with cheap beef as they scrambled to sell off their stock, hurting from a drought there.

The U.S. consumer, as a whole, turned away from beef as an everyday dinner item long ago, finding it too high-priced compared to chicken or pork." [we also say that when the relative price of substitutes falls, the demand for the good in question, in this case beef, will decrease or shift to the left, causing its price to fall]

"The current downturn in commodities prices for cattle hasn’t yet shown up at the butcher’s, with average consumer prices down from highs of about $6 per pound to a still pricey $5.50 per pound. Chicken is selling at about $1.50 per pound, pork is about $4 per pound.

“We hurt demand 10, 20 years ago,” Lenz said in an interview before the presentation. “When prices got so high, consumers looked for different things."

"So as soon as they had water and grass, the ranchers started what has been a very fast herd rebuild.

Since it takes roughly three years from the time a heifer is born until her future calf is ready for market, there’s a lot of cattle is hitting the supply chain now."

"Historically speaking, prices are still high. The January price per hundredweight (100 pounds) was $132, compared with $87.60 in 2010. But they’re not as high as what the producers were thought they would be getting.

“We had record high cattle prices, and now they’re down 30 percent,” said Jim McAdams, owner of McAdams 12 Bar Ranch in New Berlin."

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