Now that we are more than halfway through the year, it’s a good time to step back and assess what’s taken place so far in 2004. Following the Washington state BSE announcement in late December 2003, predictions that slaughter and feeder cattle prices would fall precipitously filled the news media.

The concern was twofold. First, bans on imports of U.S. beef by all major importers meant that the supply of beef available on the domestic market would be larger than it would have been otherwise. Second, there were also concerns that U.S. consumers might react negatively to the BSE announcement, leading to a possible reduction in domestic beef demand. And indeed, in the short run, prices did drop sharply as Kansas slaughter steer prices fell from $91/cwt. the week prior to the BSE announcement to $74/cwt. the week ending January 9th.

Fortunately, prices did not remain depressed for long. In fact, Kansas slaughter steer prices averaged $81/cwt. during the first quarter of 2004, 3.3 percent higher than in 2003. Similarly, prices for 700-800 pound feeder steers at Dodge City averaged $90/cwt., 13 percent higher than a year earlier. And the price strength continued during the April-June quarter as Kansas slaughter steers averaged $87/cwt. and feeder steers at Dodge City, Kansas, averaged $105/cwt. Year-to-date, (through mid-August) Kansas slaughter steer prices averaged $84/cwt., which was 8 percent higher than 2003’s. At the same time feeder steers at Dodge City averaged $100/cwt., nearly 20 percent higher than last year.

Why did prices rebound so sharply following their initial decline? The answer is twofold. First, domestic cattle slaughter and beef production have been much smaller than forecast. Second, domestic beef demand has been much stronger than anticipated by virtually anyone. An examination of the data helps illustrate both points.

Weekly federally inspected cattle slaughter during the first quarter fell 7.1 percent below 2003’s and dropped 8.9 percent below last year during the second quarter. Through mid-August, year-to-date cattle slaughter was down 9.4 percent. The year-to-year cattle slaughter reduction was compounded during the first three months of 2004 by the fact that weights were lighter than a year ago.

As a result, weekly federally inspected first quarter domestic beef production fell 8.2 percent below 2003’s. Average dressed cattle weights moved ahead of last year during the spring quarter, but beef production was still 8.4 percent smaller than last year. Through mid-August, year-to-date beef production was 9.3 percent below a year ago. The dramatic reduction in slaughter and beef production more than offset the loss of exports associated with the U.S. BSE case. As a result, per capita beef supplies in the U.S. during the first half of 2004 were nearly two percent smaller than 2003’s. Looking ahead to this fall, year-to-year reductions in slaughter are expected to moderate appreciably.

In addition to receiving support from a surprising reduction in per capita beef supplies, cattle and beef prices also received a boost from an increase in domestic consumer demand. To see this, consider that inflation adjusted beef prices during the first and second quarters of 2004 rose 12.5 and 9.4 percent, respectively, compared to the prior year. But per capita beef supplies only declined 1.5 percent during the first quarter and two percent during the second quarter, supply declines that clearly were not large enough to cause the large price increases that took place. Beef demand index calculations reveal that retail Choice beef demand was 9.9 and 6.9 percent stronger during the first and second quarters of this year, respectively, than during 2003. Since bottoming out in 1998, beef demand has increased about 24 percent.

Much of the recent demand strength has been attributable to consumer interest in low carbohydrate diets. Some survey data suggests that the consumer interest in low carb diets has peaked. Looking ahead, it’s unlikely that year-to-year increases in beef demand of the magnitude we’ve observed since last summer will continue. Still, domestic beef demand continues to be a bright spot for the U.S. beef sector. ©