Beef markets –What to expect.
Drought and higher feed prices have caused producers to send more livestock to slaughter over the past year. In 2023 our beef supply will be reduced by 5.6%. This is the largest reduction in annual supply for the last 36 years.
Shorter supplies usually mean higher prices. This is positive news for the start of 2023. Demand has remained strong for beef with consumers continuing to purchase beef even at higher prices. Retailers, suppliers, as well as restaurants give us a little more detail. Consumer purchases are leaning toward the cheaper cuts of meat at the current time. Ground beef and chucks are moving easier and at higher prices than normal compared to the more expensive cuts. This indicates that consumers are becoming more price conscious and are protecting the food budget. When this happens we need to keep in mind that the consumer can also start substituting other protein products to replace beef on the dinner table. Both pork and poultry supplies are expected higher in 2023. This increased supply will reduce the costs of these proteins and may very well hamper beef demand to an extent.
We must keep in mind the problem that the poultry producers are having with avian influenza. This virus can wipe out thousands of birds at a time thus disrupting the poultry supplies. This virus doesn’t seem to be going away and experts are suggesting that it is mutating to different forms. This seems as it is going to be a continuous problem for the poultry industry for some time.
Beef Marketing Strategy
I believe prices could be stronger in the first quarter of 2023.
Today we could put a $186.14/cwt floor under background steers for April using LRP. The cost of doing this is a little over $4/cwt . If a producer were to do this, they could guarantee a return over variable cost of nearly $250/head and have unlimited upside if the prices are higher in April. By using this approach, the cost of insurance is the highest.
On my operation we are going to handle this a little different and cut the costs of this coverage on these steers. If I back the coverage to $180.14/cwt the premium will reduce by almost 50% for putting a floor price under these cattle. Even by reducing this coverage I could still guarantee a profit of $232.00/head after variable costs.
My hope will be never to collect on this LRP policy. Not collecting would mean that the markets have increased in price between now and April and only spent $2.20/cwt to protect my already good profits.
What could happen to bring cattle markets down? Even with shorter supplies we could always have world political problems, disease outbreaks, embargos, and recession fears, among other things. It is always a good management decision to protect substantial profits. Our only decision is how much risk are we willing to accept and what should we pass on.