ELLY GRIMM
• Leader & Times
Recent numbers from the Bureau of Labor Statistics show the average price for ground beef hit $5.98 per pound in May, marking a 16.2 percent increase year-over-year.
That means beef products such as sirloin, chuck, and other cuts are also at historic highs, driven by multiple factors that continue to ripple across the industry, according to Andrew Coppin, a cattle expert and CEO of Ranchbot.
“The overall dynamic at the moment is we've got the lowest cattle herd numbers we've had since the 1960s – the overall population in the U.S. around 1960 was roughly 180 million people, and today, that number is roughly 340 million, and people are consuming on average 58 to 60 lbs of beef products a year,” Coppin said. “That's a lot more beef, but the herd numbers are the same as back then. What that's telling us is there's a lot of demand for beef products, and people in the U.S. definitely love their beef based on visits to steakhouses and fast food restaurants and similar places. It's all about supply and demand – there's not as much supply as before since it's been constrained by drought conditions and other weather volatility, and roughly 30 percent of grazing lands in the U.S. are under drought conditions, and that's very challenging. And if you're a rancher and think 'If I buy more cattle for my operation to grow more cattle, I need to know I've got pasture lands so they can eat.' If the cattle aren't in pastures, the farmers have to buy feed, which is extremely expensive. Ideally, we want to grow grass to feed cattle rather than have to buy food. Some ranchers nowadays are probably thinking 'I would like to buy more cattle, but I'm not sure about the weather,' but then they have to pay for the cattle at auction, which can be risky. Right now, it's a perfect storm of all those factors, and multiple ranchers aren't starting the process of rebuilding their herds yet because of the weather volatility and the high prices, and it's really risky in that type of environment.”
Coppin added the demand continues to be high for beef products.
“On the demand side, beef is the premier protein for a lot of people – I can't think of a lot of people who say to each other 'Let's go out for a good bite of chicken for dinner tonight,' they want to go to a steakhouse and get a steak,” Coppin said. “And people are still willing to spend money on beef products – there's definitely some inflation, but it's not really curtailing very many people's desire to spend and eat. People in the U.S. definitely enjoy eating out, and they love those places, so I don't really see that going down anytime really soon unless the prices get to a point where many people are saying 'I can't afford to go out and eat a $30 steak,' or there's inflationary shock or something like that that drives prices even higher and causes consumer confidence to drop. But at the moment, we're in a scenario where we've got high prices, low supply, and U.S. consumers loving their beef and not really considering pork or chicken as protein substitutes.”
There are also some other extenuating circumstances, Coppin said.
“One of the big things recently is the border to Mexico being shut to cattle imports – the U.S. imports about 1 million cattle every year through Mexico, so all of a sudden, there's 1 million cattle being taken out of the equation, and you can't snap your fingers and magically recoup those types of numbers,” Coppin said. “Some U.S. ranchers' business model revolves around buying those cattle, bringing them over the border, fattening them up, and then selling them to feedlots and meat processors. Taking all of those cattle out of the equation makes the cattle on the U.S. side of the border worth even more, so you have another supply-and-demand issue where more of the supply has been taken out of the market, so the markets will continue to trend up. The medium-term outlook, as far as I can see, is I'm not meeting many ranchers yet looking to rebuild their herds due to all the factors I mentioned earlier, and I don't foresee consumer confidence really being shaken too much unless something dramatic happens.”
Coppin said analysts and ranchers and investment banks are watching for inflationary pressures and/or changes in consumer behavior.
“Shoppers are already seeing some effects at the store, mainly an increase in prices of beef products ranging from ground beef to steaks and everything in between. I would think, given the current environment, things are going to stay at these levels and remain so for the next 12 to 18 months at minimum,” Coppin said. “I don't think there will be any massive price increases unless there's another supply chain shock or something like that. But again, we're already seeing U.S. consumers continuing to pay these prices because if you're a beef lover, diverting to buy pork or chicken isn't really as appetizing, so prices would have to go extreme before any major changes in consumer behavior, in my opinion. I don't think we'll see any major ramifications for U.S. consumers other than the typical inflationary pressures we're seeing across the spectrum. The higher the input costs go toward growing and processing beef, the higher the prices will be for consumers, so we've also got to watch all of that.”
Smaller farming and ranching operations in particular could be affected by recent trends, Coppin said.
“The typical mom-and-pop operations typically have only 30 to 40 head of cattle, and generally, that's not the only income for the family,” Coppin said. “On one hand, those operators are benefiting from being able to sell their cattle at higher prices, but on the other hand, they're also more likely to be affected by those higher input costs. Another challenge being faced by those smaller operations is finding labor – it's hard finding people who want to do that work, and it's also expensive. Then there are also the costs of running all the different equipment in terms of gas and usual wear and tear, etc. Smaller family farms/ranches are stuck between those high sale prices and the high input costs rather offsetting one another. I think the opportunity for those people, if they want to keep doing what they're doing and make money, they have to be willing to adapt and make some changes, especially with technology. Where Ranchbot helps ranchers in saving substantial amounts of money is sharing with them the benefits of investing in technology that allows them to focus on the bigger work instead of all the minutiae work like checking water and fencing, etc., because all of that takes time, and as the old cliché goes, time is money. I've never met a rancher with inordinate of extra time or a completed to-do list, ranchers are busy people, and there's so much extra work they're doing that they don't need to be, and a lot of that can be automated. I know there's some talk about a lot of small farms and ranches going out of business, and some of that is true, but if you're a farmer/rancher who wants to stay in it and make profits and stay competitive, you need to look at some ways to modernize things compared to what your parents and/or grandparents might have done.”
Beef processing plants will also be affected for the near future, Coppin said.
“Processors are having to pay more in terms of their own input costs. One of the challenges for the processors is they have to keep things going all the time, so when they're having to go out and pay more and more for cattle, of course their margins are getting smaller,” Coppin said. “I think a lot of the processors in the current environment where supply is lower and prices are higher, I think it's quite challenging for a lot of them, but the decision to shut down a processing plant is not one taken lightly. I would say we're at maximum processing capability at the moment, and I think some processors would like to see some of that capacity taken out of the market. The economics for them are challenging at this time, but that's part of the cycle of the beef industry – when prices are low and they can buy a lot of cheap beef, they make better margins, but at the moment, that's not quite what's happening. And those facilities still have to deliver on contracts and promises to grocery stores and everywhere else they work with.”
With multiple factors to consider, Coppin said it is kind of hard to predict the future when it comes to the beef industry.
“Analysts and ranchers and other investors are watching for what could move the dial in either direction. In economic markets, it's really hard to properly predict what will happen,” Coppin said. “However, if I was going to speculate, I would say the most probable outcome is inflation pressures driving prices higher and decrease U.S. consumers' appetite for luxury goods. But again, I couldn't fully say whether or not that would result in substantially lower prices. The best-case scenario would be for beef prices to more or less plateau and move sideways, which could mean ranchers make some good money throughout the next couple years, which would be good for them and the industry given some tough times in the past several years. And that could mean farmers and ranchers being able to invest more into their operations and start rebuilding their herds.”
