Live Cattle prices hit new all-time high

March 14, 2016 by Matt McCracken

Live cattle prices climbed to a new all-time high yesterday hitting just over 1.54/lb.  This is not good news as football season is approaching and this may cut into tailgating budgets.

Cattle prices are one commodity which have done a whole lot of nothing in the past 40 years.  We've seen multiple price spikes in things like oil, nat gas, copper, gold and silver.  Prices for foodstuffs have been all over the map.  But prices for live cattle have been just trudging along.  From 1980 though 2003, prices meandered in a range between 50c and 80+c.  From 2003 through 2011, prices oscillated between 75c and $1.10.  But since 2011, prices have been traveling north on a fairly consistent basis.  Here is a chart of live cattle prices since 1980. 


So why are prices just now going up?  The answer obviously has to do with supply and demand.  Demand for beef has largely been consistent in our country for a generation.  While the population has been growing, beef consumption was stable as our diet shifted to chicken and other non-red meats.  But in the past 10 years, two trends have emerged that are strongly bullish for cattle prices. 

On the demand side, a burgeoning middle class in emerging economies, notably China, has increased beef consumption.  Very little meat was consumed in China prior to the year 2000 but now its common for them to consume meat.  On the supply side, ranchers have been culling their herds for years due to various hardships.  The rise in corn prices prior to the 2008 financial panic was hit #1.  Then a multi-year drought was hit #2.  Finally, abnormally cold winters the past two years reduced herd numbers and resulted in many premature deaths.  The feedlots I've spoken with said numerous calves were found dead in the trucks upon their arrival at their lots.  In addition to all this is higher prices for things like fuel and feed which have squeezed cattle ranchers.  In order to survive, they have been selling off their herd.

We think the reduction in herd size is critically important to the long-term story of cattle.  Cattle is very unique in that momma cows can only produce one calf a year (on average).  So if cattle consumption is at or above the size of our nation's inventory of cattle, there is no way to increase the supply of cattle.  We can't plant more acres of cattle or drill more cattle wells.  There is no way to increase the number of cattle in this country if consumption stays consistent.

But it gets worse.  Cattle ranchers are selling off their herds now in even bigger numbers because they have never seen prices like this before.  After a lifetime of hardships, they are taking this opportunity to cash in.  Cattle is the one commodity where "high prices is the solution for high prices" doesn't work.   Because high prices results in selling off the herd rather than reinvestment.  When nat gas prices spiked in 2005, America got busy innovating and drilling and now we a glut of nat gas.  When grain prices climbed a few years back during the droughts, America's farmers went to work and have been planting a record number of acres.  But unfortunately, hard work and innovation are not going to change Bessie's procreation cycle. 

Given the growing demand for beef coupled with the unique supply issues in cattle, I think prices could go even higher.  They've come along way in a short period of time so a pause or correction wouldn't surprise me at all but if I had to be long one single commodity for the next five years, live cattle would be it.