In the News: Price of Beef and Cattle

As a man who loves a good ol' char-grilled steak, the price of Beef and Cattle are of great interest to me.  As an Economics Professor, I also recognize the work of market economics in driving the price and availability of good steaks and beef.  Cattle are the resource that produces beef.  The cost of cattle drives the cost of beef and ultimately affects the price you pay for a steak in a steakhouse, a pot roast at a local grocery store or a burger at a local burger joint.  Texas is one of the largest producers of cattle and beef, and the markets for both of these have been affected by a number of factors.

In the Houston Chronicle, back in May of this year, it was stated that Cattle prices were rising as ranchers began rebuilding their herds.  2011 was a severe drought in Texas and much of the North American Midwest from Manitoba through the Dakotas, Nebraska, Texas and all the way down to Sonora and Chihuahua.  These are regions where a lot of agricultural products--especially grain and cattle--are produced in North America.  Per the article:

A quality cow that sold last year for no more than $1,800 now fetches about $3,000. The
average price for a bull is up $500. And a cow with a 300-pound to 400-pound calf by her side is selling for about $2,800, sometimes more than $3,000 — almost double the $1,700 they commanded two years ago. 

Last year's historic drought forced ranchers to cut their herds because they had no grass and couldn't afford high hay prices. Hundreds of thousands of cattle were slaughtered or sent out of the state, leaving Texas, the largest livestock producer in the nation, with its smallest herd since the 1950s.

All of these factors are pointing to shifts in Market Supply and/or Market Demand.  

Lets break this down one step at a time:

2011 Market for Beef

In 2011, there was a severe drought.  As a result of this, the cost of maintaining cattle being raised for beef went up since ranchers had to buy hay or grain, and pay more for water in order to raise cattle.  The end result was an increase in the slaughter of cattle, making the supply of beef (meat produced from cattle) increase.   This particular factor (the excessive, unexpected drought of 2011) is called Supply-side Sunspot activity.  The fact that weather is beyond the control of ranchers and that it affected their cost of maintaining cattle led to the thinning of the herd at that point in time.  (Consider: what does thinning of the herd do to the ranchers' operating costs AFTER their herds are thinned?) The Graph to the right shows that the equilibrium price of beef last year dropped due to the extra cattle slaughter, flooding the market with cheap ground beef, steaks and other prime cuts of meat--equilibrium quantity of Beef rose while equilibrium price of Beef dropped.

2012 Market for Live Cattle

Now fast forward one year.  During the past winter, we had plenty of rain, watering ponds on ranches filled up, the grass grew thick, lush and green again and now Ranchers are looking for cattle to restock their herds.      As a result we see the price of cattle increasing due to the Ranchers wanting and being able to buy more cattle to restock their herds.  (Consider:  which curve is moving for cattle?  Why is it making the price of cattle rise?)  Since many ranchers are considering this to be a better year and many are optimistic, they are buying up more cattle.  Ranchers are the buyers in the market for live cattle, and therefore this is a case of a shift in market Demand, caused by a change in consumers' expectations of the future.    The graph on the left illustrates how when market Demand increases with no change in Supply, equilibrium price and quantity increase.

Jason Cleere, a rancher and beef cattle specialist with Texas AgriLife Extension at Texas A&M University, believes that while ranchers are restocking, they remain cautious. The rains have slowed significantly in the past month, and many ranchers are heeding climatologists' warnings that the next decade in Texas will be relatively dry. They're keeping herds small so they're better prepared for the next, inevitable, dry spell. 

"Ranchers in general have been a little bit more conservative on going out and rebuilding because they want to see what happens as we move into the summer," Cleere said. "Ranchers went through a lot of cash reserves last summer, and they can't do that again this year." With cattle prices high, cash reserves low, the weather uncertain and calves taking nine months to be born and several years to be ready for slaughter, many estimate the beef industry may need five years to fully recover. 

It's a layered business. There are those who raise cattle for breeding. They sell to ranchers who raise cattle for beef and breed their herds to restock. Livestock dealers buy cattle from those ranchers and sell the animals to feedlots, where they are fattened up before heading to slaughterhouses.  The drought impacts each layer of the market differently.  

 Of course, what most of us who consume beef want to know is how will this affect the price of our favourite steaks, burgers, ribs and brisket?  And you students need to speculate on how each layer of the market as affected and how it ultimately plays out for the consumer of the final good.

Questions for the Comments Section:


1.  What does the increase in the price of cattle do the the costs of raising them to the ranchers who breed cattle?  The ranchers who raise cattle for beef?  The ranchers who raise cattle to produce milk/dairy products?


2.  How do these events affect Livestock dealers and the price of cattle sold to feedlots?  


3.  How do all of these things ultimately affect the price of a steak or a burger to the consumer?  


Remember:  Although both S & D curves may shift usually one shifts by a greater magnitude than the other, dominating the effect.  


Success to you all!!!

Prof. Hank Lewis