Inflation and high interest rates are having an ironic effect on supermarket beef prices -- actually preventing them from hitting new heights. Both producers and consumers are benefiting from this phenomenon. Extremely high beef prices inevitably lead to plunges back to low levels which, although momentarily pleasing to shoppers, bankrupt cattlement. The government goal is to come up with long-term strategies to smooth out both the highs and the lows.
The beef price gyrations, which periodically send shoppers scurrying for pork , poultry, fish, and even soybeans as alternatives, result from the supposed biological inevitability of the "cattle cycle." This is a 10-year tide in rising and falling beef prices that has flooded and then drained US meat counters eight times this century.
Traditionally, the boom-and-bust cycle is blamed on breeding heifers. Because it takes heifers time to produce calves, farmers face a choice: Either quickly fatten the heifer calf to slaughter weight for beef or else keep the calf for breeding purposes.
Rising prices naturally encourage cattlemen to keep more heifers back to expand their herds. This response automatically reduces the supply of slaughtered beef and drives supermarket beef prices up.So, in the topsy-turvy world of beef supply and demand, high beef prices escalate. Cattlemen naturally want to raise more beef for a sellers' market. In the process, they build up their herds and thereby restrict beef supplies.
As part of this process, the cattle industry overreacts to high prices, overexpands its herds, and then faces a period of heavy losses when beef supplies exceed demand.
US Department of Agriculture (USDA) economist Richard Crom says that both the cattle industry and the government now are better prepared to control the cattle cycle. He says that the government's grain reserve program helps stabilize the feed prices which are a major cost factor for the cattle industry. Improved government information on cattle numbers and both domestic and export demand, he says, also help stabilize the situation.But the major advance, he says, is that "farmers have become more sophisticated managers, handling bigger businesses, making more management decisions and more use of the new information we can give them."
One factor currently upsetting the normal cattle cycle sequence is high interest rates. These have an immediate dampening effect on the capital-intensive $35 billion US cattle industry. Instead of borrowing money to finance herd expansion, farmers are forced to sell heifers they would otherwise use for breeding.
Weather and feed grain exports also affect the cattle cycle. A combination of drought and high export levels eight years ago sent feed grain prices skyrocketing. Coming at a time when cattle numbers were about to peak at 132 million head, these factors forced a massive reduction of cattle numbers -- and massive losses for cattlemen forced to sell cattle at far below the cost of production.
Currently cattle numbers are rebuilding from their 1979 trough of 111 million head. Normally, this would mean restricted supplies and steadily escalating supermarket beef prices. Instead, the growth is slower than expected, bringing with it the hope that government and the cattle industry have learned lessons from the past about how to stabilize production.
Tommy Beall, director of market research for Cattle-Fax, the market analysis arm of the National Cattlemen's Association, says that "the incentive right now is to liquidate rather than expand." The July 27 USDA report on cattle numbers indicated that the incentive is working. Overall expansion is put at 2 percent rather than the expected 3 percent.