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Beef prices likely to drop: Bad commodities markets are good news for beef lovers

By , Staff WriterUpdated
Various cuts of beef and port are displayed for sale in the meat department at a discount market in Arlington, Virginia. Beef prices reached record highs in 2014 but should come down at the consumer level now that herds have rebounded and the high dollar has forced exports down.
Various cuts of beef and port are displayed for sale in the meat department at a discount market in Arlington, Virginia. Beef prices reached record highs in 2014 but should come down at the consumer level now that herds have rebounded and the high dollar has forced exports down.J. Scott Applewhite /Associated Press

The U.S. beef herd is fat, but ranchers aren’t so happy.

American cattlemen, who were already grappling with an oversupply of plump livestock that were driving prices lower, are now facing a drop in demand as the economic slowdown in Asia reduces the worldwide appetite for beef.

The bottom line? Consumers should soon start seeing supermarket circulars advertising sales on hamburger and brisket.

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For now, grocers and restaurants are still riding out high profit margins from a historic two-year rally in beef prices, said Pete Bonds, a Saginaw rancher who heads the Texas and Southwestern Cattle Raisers Association. But with wholesale pricing down, he said the market can only hold out so long before one of the major grocery store chains starts slashing prices and forces others to do the same.

“Somebody will step up and say, ‘Boy, we’re making a lot of money with this beef. We could sell a lot of steaks if we dropped the price,’ ” Bonds said.

Prices have already dropped at H-E-B, which has close relationships with Texas suppliers and knows its customer base is big on beef, chain spokeswoman Dya Campos said. Brisket that was selling at more than $3 a pound last year dropped to $1.97 per pound in December. Ground chuck dropped from $3.79 to about $2.97.

Producers gripe about the difference between what they are paid and what consumers are charged for beef. But layers of middlemen all take a cut as the beef travels from farm to table, she said.

“You have the producers, you also have the feeders and you have the packers, and then you have the retailers. And so there are several layers of industry involved in the sale of beef,” she said. That said, Texas probably has some of the lowest beef prices in the nation, she said.

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“H-E-B also recognizes that beef is a very key commodity to families,” especially in Texas, Campos said. “As soon as we see the market drop, we pass on any kind of savings to our customers.”

Rob Green, executive director of the National Council of Chain Restaurants, said restaurant chains — the largest purchasers of beef — were hard pressed to lower menu prices when prices were so volatile.

The U.S. Department of Agriculture’s yearly cattle inventory, released Friday, showed the U.S. cattle herd at 92 million head as of Jan. 1, up 3 percent from the 89.1 million head reported for January 2015, which was the first herd increase in nine years.

Beef prices reached record highs in 2014 following droughts in 2011 and 2012 that browned pastures and decimated crops such as corn. That thinned out the herds, drove up feed prices and led to cows that were literally too thin. Federal regulations for corn ethanol, which President Barack Obama eased late last year, also were keeping corn and feed prices artificially high, Green said. Demand for beef from China, whose economy was growing at double-digit rates, was also on the rise and driving up commodities prices.

“It’s created a lot of pressure on chain restaurants’ margins,” Green said. “If you look at lean trim, a proxy for a hamburger in a quick service restaurant, the price of that commodity has gone up 46 percent since 2007...That’s why, particularly at the chain restaurant level, you’re not seeing relief in menu prices.”

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Rain and corn, however, have been plentiful in recent years. And ranchers have been overfeeding their cattle, growing them too large for some meat plants to process. Demand from Asia also has slowed as its economy has cooled over the last five years. That has forced suppliers in Australia and other countries to reroute their beef here.

“If those markets buy less beef, the Australians (have) got to find somewhere to send their beef,” said David Anderson, livestock and food products marketing economist for Texas A&M AgriLife Extension Service. “And low and behold, we have record high prices so they send it here.”

China’s slowing economy has reverberated throughout the cattle industry, said Derrell Peel, Oklahoma State University’s livestock marketing specialist.

U.S. ranchers are technically banned from exporting their meat to China due to several cases of mad cow disease that have cropped up here over the last 14 years, Peel said. “But they have been importing more beef officially as well as unofficially from Australia and other places and so the slowdown in the Chinese market potentially affects the entire global trade market,” he said.

“China on a per capita basis doesn’t consume a lot of beef, but not a lot of beef times 1.4 billion Chinese is still a lot of beef,” Peel said.

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Fat cattle is another problem.

Cattle is sold by weight, not the number of livestock being processed. Feed lot operators hoping to ride out plummeting cattle prices took advantage of falling corn prices to plump up their livestock. But the strategy backfired as the animals were becoming too large for some processing plants to handle.

“Everybody’s looking at numbers. It’s not numbers, it’s tonnage,” Bonds said. “If you’ve got 5 percent fewer cattle and you make them 10 percent bigger, then you’re actually putting more meat on the market.”

Specialty slaughter houses were processing fat cattle in volume by late 2015, bringing those cuts of meat onto the market and further pressuring prices down. “There was a kind of clean-out of the fed cattle market,” Peel said. “The market prices really crashed briefly to sort of flush those animals out of the system if you will.”

Beef prices have dropped by about 30 percent over the last few months as a result, said Tracy Tomascik, who specializes in livestock for the Texas Farm Bureau’s commodity and regulatory area.

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Beef prices were $1.68 per pound Friday, down from a peak of $2.73 reached in September 2014.

“If we continue to see a decline at the rate that we’ve seen in the last three to four months, well then we’re going to be in trouble in the next quarter or in the middle of the year 2016,” Tomascik said.

In today’s market, the price Pleasanton rancher Ty Keeling pays for a calf may be higher than what he can get by the time it grows into a 1,300 pound steer in two years.

“If I buy high and the market crashes, I’m stuck,” Keeling said. “So it doesn’t matter how good a job I do or how much it rains or how much grass I get. They might not even be worth what I paid for them at the beginning of the process.”

“It’s a wonderful life but a terrible business,” he said. “It’s just unfortunate because you can do everything right managerially and you can get the range, but it’s a margin business. And if you buy wrong and you sell wrong then you’re wrong wrong.”

lbrezosky@express-news.net

|Updated

Lynn Brezosky is a business writer at the San Antonio Express-News.