Lee Schulz

Lee Schulz, Associate Professor in the Department of Economics at Iowa State University

AMES, Iowa – The United States continues to produce record amounts of beef, pork and poultry. Despite the high production and lower prices for competing pork, demand for U.S. beef – from both domestic and foreign consumers – continues to support the high production.

“Retail beef prices were higher in 2018 than in 2017, despite an increase in beef production suggesting strong beef demand,” said Lee Schulz, associate professor in the Department of Economics at Iowa State University, during a recent phone interview. “Through the first two weeks of 2019, the comprehensive beef cutout has averaged $8 higher than a year ago. Retailers have increased their beef features, helping support wholesale beef prices despite larger slaughter levels.”

Just because beef production is up does not necessarily mean that the average U.S. consumer is purchasing and ultimately consuming that much more beef. The last USDA WASDE report noted, per capita beef consumption in 2018 was up just 0.2 pounds per person or 0.4 percent despite the 2.9 percent increase in beef production. “Higher retail beef prices even with this modest increase in per capita supplies suggests robust beef demand,” Schulz noted.

Exports were a big part of the story in 2018, up 11.5 percent year over year by volume, and will once again be critical for the market in 2019.

“Our export customers bought more, and they paid more for it than a year ago,” said Schulz. “That shows you how strong demand was for beef in 2018. More modest export growth is forecasted for 2019, up only 2.4 percent, but it is worth noting that the modest forecasts the past two years have been sharply exceeded. I'm expecting prices in 2019 will be a replay of 2018 prices, when we look at both feeder cattle and fed cattle.”

According to Schulz, the average fed cattle price in the Iowa/Minnesota reporting region last year was $116.50 per hundredweight. Right now, futures market prices are suggesting similar prices for 2019.

When looking at the top four U.S. export market destinations for beef, all increased. Japan is about 28 percent of U.S. export market share, Mexico 14 percent, Canada 10 percent and the big story is South Korea which now makes up about 20 percent of the U.S. beef export market share.

“South Korea was really a star market in 2018 for beef, you saw a 40 percent increase by volume and 50 percent increase by value of our exports going to South Korea,” he said. “It jumped from a 17 percent share in 2017 up to 20 percent in 2018.”

South Korea demand for U.S. protein has consistently been on the rise. Amendments and modifications to the Korea-U.S. Free Trade Agreement (KORUS) last year was certainly good news for the U.S. beef and pork industries. Under KORUS, most U.S. pork products now enter Korea duty free. The duty on U.S. beef was reduced from 40 percent to 21.3 percent and will continue to decline each year until it is eliminated by 2026. These tariff rate reductions have given the United States more market access to the South Korean market and enabled them to expand their purchases.

While the beef market is seeing benefits from global trade, issues with tariffs and the trade war have negatively impacted the pork industry. Pork prices are at the market clearing price in an effort not to build cold storage levels up to unmanageable levels and keep foreign buyers interested as they face higher tariff rates.

“Pork production has set records the last four years and 2019 is likely to be the fifth consecutive record,” he said. “These record supplies underscore how important demand will be in determining 2019 prices. There is going to be stark competition for consumers’ dollars, but we have really seen the demand profile for beef and, therefore, cattle hold up so far.”

A strong economy and low unemployment could be factors contributing to strong domestic beef consumption.

“All of that points to the ability of consumers to buy more protein and buy more high-quality protein that meets their tastes and preferences,” said Schulz.

At the retail level, pork prices have started to fall slightly, while beef prices have increased since August.

“Consumer demand for higher quality steak cuts has been very good since mid-2018, resulting in a higher price for this product at the wholesale level,” he said. “Beef cutout outperformed the pork cutout toward the end of December, which was due, in part, to stronger beef demand at the retail level during the holiday season.”

The big question is where the beef industry sits in the current cattle cycle. What is the status of herd rebuilding, heifer retention, and the size of the 2018 calf crop?

The answer to these questions lies within the USDA Cattle inventory report which will detail inventories as of Jan. 1, 2019. Unfortunately, USDA’s National Agriculture Statistics Service (NASS) is included in the partial government shut down, which may impact the release of that report.

“We are all watching to see if the report is postponed or canceled due to the government shutdown,” he said. “The beef cow herd likely increased less than 1 percent year over year in 2018 to a projected January 1, 2019 level of about 31.9 million head. This could be the cyclical peak in herd inventory or very close to it.”

From there, the national beef cattle inventory would start to stabilize or even decrease, but if demand continues to be strong and prices good, it is difficult to predict.

“Many evolving demand and supply factors that are currently unknown will determine the trajectory of cattle inventories in the next two or three years. The cattle industry continues to face tremendous uncertainty including global dynamics, domestic political chaos, and market volatility. Unfortunately, the possible failure of USDA NASS to be able to provide the January Cattle inventory report would add to the uncertainty about the current situation as well as what is to come,” he said.

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