by Dr. James Mintert, Department of Agricultural Economics, Kansas State University

Will 2004 Be Another Good Year for Beef Demand?

Slaughter steer and boxed beef prices were record high during 2003. Kansas slaughter steers averaged $83.50/cwt. during 2003, about 24 percent higher than during 2002. Similarly, USDA’s light Choice cutout averaged $144/cwt., 25 percent higher than a year earlier. A multitude of factors led to the sharp year over year increase in cattle and beef prices. One of those factors was surprisingly strong domestic beef demand during 2003.

But renewed strength in beef demand alone did not account for all of the dramatic cattle and beef price rise during 2003.

An improved understanding of what led to the price rise last year makes it easier to anticipate what’s going to happen in the future. Principal factors that contributed to last year’s price rise, in addition to the increase in beef demand, include smaller domestic cattle slaughter, reduced cattle imports from Canada, smaller net beef imports from Canada, smaller beef imports from sources other than Canada, and higher beef by-product values. Recently, Professor John Marsh at Montana State University examined prices in October 2003 vs. October 2002 to try and isolate the relative impact these and other factors had on cattle prices. His results indicate that about 78 percent of the slaughter cattle price increase that took place from fall 2002 to fall 2003 was attributable to smaller cattle and beef supplies. According to Marsh’s analysis, 14 percent of the 2003 price increase occurred because of the ongoing improvement in domestic beef demand.

Increases in beef by-product values accounted for the remainder of the increase in slaughter cattle prices.
Although improving beef demand only accounted for 14 percent of last year’s increase in slaughter cattle prices, it is still in marked contrast to all of the 1980’s and most of the 1990’s when year-to-year declines in beef demand were the norm. Beef demand index calculations reveal that domestic retail demand for Choice beef rose between 5 and 6 percent last year, which was the largest annual beef demand increase since the recovery got underway in the late 1990’s. And last year was the fourth year out of the last five that domestic beef demand improved. The cumulative increase in beef demand since beef demand bottomed out in 1998 now stands at 16 percent. Looked at another way, beef demand has now recovered back to the approximate level that existed in 1992/1993.

Looking ahead to 2004, the situation looks quite a bit different than last year. Per capita beef supplies in the U.S. market during 2003 totaled 64.8 pounds, 4.1 percent less than during 2002. But during 2004, it looks like supplies faced by domestic consumers will actually be larger than last year. The primary reason of course is the loss of major export markets during 2004. Domestic annual beef production will be near last year’s level, but beef imports could rise modestly (partly to offset loss of access to Canadian cow supplies for lean beef trimmings) and annual exports could decline by 50 or 60 percent compared to last year, assuming major importers again allow U.S. beef imports later this year. The result could be a year-to-year increase in domestic beef supplies of nearly 4 percent, compared to 2003. The increase in domestic per capita beef supplies, driven largely by weak exports, is the main reason slaughter cattle prices this year could average 8 to 10 percent below 2003’s annual average.

Still, there are some encouraging signs. Domestic beef demand was stronger during the last half of 2003, especially the fourth quarter, than during the first half of 2003. For example, beef demand rose 11 percent above the prior year during the October-December quarter, compared to a modest 2.3 percent increase during the January-March quarter. And domestic consumers apparently did not allow the Washington state BSE case to scare them away from beef. Strong economic growth during 2004, continued interest in low carbohydrate diets, and new product offerings by the industry could fuel another year of strong beef demand growth. And if that happens, prospects for 2005 look bright indeed. ©