US cattle has been one of the few bullish commodity prices during 2014, with futures prices up over a quarter since the start of the year to around $171 per hundredweight. The surge didn’t start there though. Since early 2009 cattle prices have more than doubled as beef cow numbers declined from 32.7 million in 2006 to 29 million at the start of 2014. The decline in herd size exacerbated by high feed (corn etc.) prices due to drought, incentivising farmers to send cattle to slaughter. With cattle inventory and production generally following predictable cycles, lasting around 10 to 12 years the upward pressure on prices could continue for another 2-4 years.
Increasing cattle prices spur producers to retain female animals to increase the breeding herd, initially reducing slaughter numbers and as a result, prices increase even further. This is what is happening now. Heifer (female cows who have not given birth) slaughter is down 9% so far this year resulting in nearly 1.7 million fewer females going to market this year and thus lowering slaughter numbers by over 5%.
However, once these female animals begin producing offspring and eventually reach slaughter weight, there may be an oversupply of livestock. Prices begin to decline and it eventually becomes unprofitable to raise and feed young cattle. Producers then begin culling the breeding herd and sending them to slaughter, adding additional numbers to supply and causing prices to decrease even further. This still appears to be some way off however with no indication yet that the decline in cattle supplies has slowed.
Economics would normally suggest that consumers would react to the rise in prices by switching to cheaper substitutes. However, alternative meat products have also had their supply problems too. Pork production has been hit, in part due to the loss of livestock to the PED virus. Although prices have since retreated from the peak set in July, lean hog prices are still up almost 13% this year. Meanwhile wholesale turkey prices are up 16% compared with November 2013 due to lower farm output, again a legacy of previous drought conditions.