As a beef producer and beef lover, there’s nothing I like better than a good ribeye steak. Seasoned with salt and pepper, seared and grilled to a sizzling medium rare, and served with a melting pat of butter on top, I love everything about steak. Everything, that is, except the price tag.
Beef prices are at a record high—a good thing for a cattle rancher like me, but at the retail level, consumers are feeling the pinch.
So how did beef prices get to these record highs? At face value, it’s a simple supply and demand issue. As of last summer, the USDA reported that there are only 29 million cows in the United States, the smallest cowherd on record since 1951. And on the demand side, per capita expenditure for beef is up 5.2 percent from 2013. As you can probably guess, it’s not that simple, though. There’s far more to the story than what meets the eye.
“It’s very difficult to use the traditional supply and demand situation as a model for what’s happening in the beef industry right now,” says Matt Diersen, South Dakota State University Extension specialist in risk and business management and professor of agricultural economics. “It’s been a weird phenomenon to watch unfold, and it’s difficult to talk about prices in the range they are at today because it’s way outside of the bounds of where we have ever been previously.”
My own personal experiences in the beef business make a good case study for the extreme highs and lows ranchers have seen in the last five or six years. I got my start in the cattle business straight out of college in 2009, and it was certainly a rough time to jump in with both feet. Although I was raised on a cow-calf operation, the learning curve in the school of hard knocks has been a steep one.
In 2009, the nation was still in a deep recession. Additionally, feed, fuel, and fertilizer costs had more than doubled, meaning it cost $100/head extra to maintain a mama cow than it had in previous years. With corn escalating to a whopping $8 a bushel—driven by the ethanol mandate of the Renewable Fuel Standard—grazing land was plowed for raising row crops, and land rent skyrocketed. As a result, ranchers focused on ways to feed more affordable distillers grains (a byproduct of corn from the ethanol boom), but still, many feedlots sat empty since the cost of doing business was higher than what fat steers were bringing at market. The result was major contraction in the U.S. beef herd—a trend that lasted for several years.
Admittedly, I was starting to have doubts about my future in ranching, and I was certainly in the minority for choosing to take my chances in the cattle business. With so many major hurdles to jump, cattle ranching lost a lot of its appeal for young people, and many of my peers left the farm for more lucrative opportunities in town. According to the 2012 USDA Census, the average age of the U.S. rancher is 58 years old, and the number of beginning farmers like myself has shrunk by 23 percent since the last Census was released in 2007.
“We’re seeing further consolidation and fewer operations today,” says Duane Lenz, CattleFax general manager. “It’s extremely hard for young folks to get in the business with the price of cattle, as well as the price of land. There is a lot of competition for how to use the land—from crop farming, oil, hunting, timber, and urbanization. It’s a tough business to get into.”
Then, the drought
As I slowly built up my own herd, trouble was brewing across the nation. In 2011, a severe drought in the Southwest forced many ranchers to liquidate their herds. In fact, a survey conducted by the Texas and Southwestern Cattle Raisers Association estimated the average herd was reduced by 40 percent due to the dry conditions. Texas, Oklahoma, and California—three of the five top beef-producing states—were hit the hardest.
In 2012, the drought hit closer to home in South Dakota. By 2013, the drought spanned across the nation. The widespread deterioration of crop, pasture, and hay conditions made the drought the most damaging in a quarter-century.
“The drought hit pastures and hay ground pretty hard, which certainly limited expansion,” explains Diersen. “Many were forced out of the cow-calf business because pasture and hay got too hard to come by.”
The cows that folks did manage to keep faced their own challenges. The extreme heat and shortage of forage affected the breed-up, too. Suddenly, many of the cows that ranchers had left wouldn’t be producing a calf the next year. At this point, producers were stuck; they couldn’t afford to feed a cow record-high priced feed and supplements if she wasn’t producing—especially with beef prices at record highs. So even more contraction took place as these once-breeding cows entered the beef market.
Finally, after several long years, the moisture returned in 2014, and the percentage of pastures across the nation rated “very poor” by the USDA-NASS Drought Monitor dropped from 80 to 27 percent. Although California is still experiencing drought, the Great Plains region had only 15 percent of its pastures rated “very poor” in 2014, compared to 28 percent in 2013. In Texas and Oklahoma, the pastures in “very poor” condition dropped from 33 percent to 25 percent.
With ample rains, range and pasture conditions improved. By 2014, hay production ramped up 10 percent, and hay prices dropped to $174/ton—compared to $310/ton during the drought in 2011.
This is good news for my own operation, as we have been able to purchase extra hay to have on hand this winter, and it’s been just as cheap as what we put up ourselves. Less costly hay has made it a lot easier to stockpile forage than in previous years when the price was escalated due to the drought.
Happy days are here
Along with good hay yields in 2014, there is now an abundance of corn on the market. The USDA is projecting the 2014 corn crop to exceed 14 billion bushels, topping the record-high harvest in 2013. Already, corn prices are down 13 percent in 2014, after decreasing by a whopping 40 percent in 2013.
“The variables are just right for expansion,” says Diersen. “Hay yields were good in 2014 nationwide. A corn surplus allows for more available corn stalks and silage as cheap feed. Ethanol is able to ramp back up, so there will be an increased amount of dried distillers grains available for beef producers. Even if farmers cut back on corn production next year, corn prices won’t jump back up enough to send ranchers back to contraction.”
The markets are pointing toward expansion, too. Heifer slaughter is down 9 percent and beef cow slaughter is down 17 percent. Because there is grass to graze and corn is affordable, ranchers are electing to hold on to breeding stock for the first time in years.
At home, we have expansion plans, too. We are actively seeking to buy more bred heifers to calve out this winter, but it might be costly to do so. Bred cows selling through our local sale barn are currently ranging from $2,800–$3,200. At the last purebred sale I attended, the bred heifer average was $4,200—a big jump from previous years.
“The market has all the indications for being a great time for beef producers,” says Diersen. “Ask yourself, what is possibly out there to push it higher? It’s tough to paint a scenario that moves prices even higher next year. Some expansion will occur this year to rebuild for next year, which will keep replacement heifers and cows out of the market for now. Also, calf harvest is very low; nobody is harvesting veal calves because there’s more incentive to raise calves to maturity weights now. It’s going to take a little while to increase beef supplies, but the markets indicate producers are thinking about it.”
It’s amazing what a difference a few years can have on a rancher’s outlook. When I first went to the banker to tell him my plans in 2009, he practically laughed me out the door. As a result, I slowly built my herd, alongside my husband Tyler, using disposable income from our full-time jobs. In 2013, when we approached our ag lender about an operating loan to help us expand, he happily offered us a bank note and gave us the go-ahead to buy more cows.
It’s obvious our banker has reason to feel optimistic about the beef business. At press time for this magazine, fat steers were selling at an all-time high of $170 per hundred weight (cwt.)—a 23 percent increase from 2013. It’s certainly an improvement from 2009, when input prices were at an all-time high, and fat steers were selling for a low $100/cwt.
These kind of prices have allowed ranchers, including myself, to eliminate some debt, update equipment, think about expansion, and have a little paycheck at the end of the day, too. Without a doubt, it’s an exciting time to be in the beef business. Likely, these will be the years I tell my future grandchildren about.
The competitive edge
Every rancher cashing record checks and buying new trucks has a haunting feeling in the back of his mind: How long will the good times last? Will beef price itself out of the market? Is steak going to be the next lobster? Despite profitable times, wise ranchers have reason to worry about the price of beef.
“It’s uncharted territory, so we are trying to find our way through it, along with everyone else,” says Lenz. “It will be up to the consumer to tell us what they can and cannot afford, so the beef industry will have to adjust. At some point, we might be forced to do just that. Even if beef prices do back off, the industry should remain profitable, especially at the cow-calf level.”
As the price of beef has risen, consumers are looking for more affordable options.
“We certainly have competition in the marketplace, especially domestically,” says Lenz. “We are getting to that point where consumers will look at other proteins over time.”
In 2013, per capita consumption of beef was 54 lbs., and although there’s been a slight uptick from the year previous, that number is down from 91.5 lbs./year in 1976. Today, chicken is a staple for many Americans who consume, on average, 60 lbs./year, a startling jump from just 16 lbs./year in the 1950s. Pork is also quickly becoming a go-to protein choice, with per capita consumption at 45 lbs./year.
“We harvested 4 billion bushels of soybeans in 2014,” says Diersen. “That’s a lot of protein in the bin that might make the tofu burger a viable protein alternative, not to mention cheap feed for poultry and hogs. Consumers are definitely facing some sticker shock right now when they go to buy hamburger, so there will be some added pressure from competing proteins.”
In general, food prices have increased 8 percent in the last year, so saving money on protein certainly helps decrease the grocery bill. In 2013, beef prices reached an average of $5.36/lb., while broiler chickens were at $2.03/lb. and pork was $4.10/lb. However, despite the price tag, it appears people still want beef.
“I don’t think we’ve hit that limiting point yet,” Lenz adds. “So far, we keep producing beef and offering it in the marketplace, and our consumers keep buying it. There’s less beef out there, and people are demanding more of it.”
Here’s the beef
Barring unforeseen circumstances, Diersen and Lenz don’t see anything on the horizon that would hurt beef prices and anticipate a few good years for beef producers.
“If there is any kind of moderation in beef prices, you’re going to have some pent-up demand,” explains Diersen. “If I can get a steak at a decent price, you can bet I’m going to buy beef regularly again. If you look at the big picture, I don’t think beef will become unattainable for folks. The demand will still be there. People don’t want to eat chicken all day every day. People still love their beef.”
That love of beef extends overseas, as well, with an emerging middle class in developing countries around the world demanding beef.
“Demand overseas remains strong, especially for U.S. grain-fed beef,” says Lenz. “Exports will be up 1-2 percent this year, with countries like Egypt becoming very good customers of ours. As the global population grows and there’s more wealth, people are going to seek beef.”
Diersen predicts that there will be more pounds of beef produced by the second quarter in 2015, but other meats are also ramping up expansion, he says, which will compete for beef’s market share. Lenz, on the other hand, thinks it will take upwards of three years before beef supplies recover.
Without a doubt, my young career in the cattle business has seen its share of ups and downs. In the last decade, my ranch has survived sky-high feed and forage prices, a devastating drought, competition for land to be used as crop ground, and a definitive “no” from the ag lender when seeking money to expand. These low points are in the rearview mirror now as we’re moving forward into a time where beef prices are high, global demand is growing, and new opportunities for ranchers like me (approved enthusiastically by a banker) are just around the corner.
So, we plan to retain more replacement heifers, invest wisely in more bred heifers, stockpile on cheap corn and hay, pray our consumers continue to love our product, and savor every last bite of steak we raise.