Beefing about beef prices? Look down the food chain – Twin Cities

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Edward Lotterman

One hears much beefing about beef prices these days.

A recent online comment moaned about paying $72 for three New York strip steaks at Costco. We got a large beef roast and paid $48. What’s going on? Why are prices so high?

The answer is simple: Many things. Teasing out the exact cause and effect takes time. But consider these factors:

Price gouging by monopolies is the root of all inflation for the progressive Elizabeth Warren-Bernie Sanders wing of the Democratic party. In one aspect and to a degree they are right, although the root causes of inflation remain in the Fed’s monetary policies.

However, a government fixation from the 1930s through the 1970s on busting monopolies and punishing price fixing has swung 180 degrees — to government for the next four decades turning a blind eye to abusive market power. In that time, there was a lot of consolidation and adoption of business practices that reduced competition and increased consumer costs in many industries.

This includes meat. There are increasingly fewer meat packers. Overall, wholesalers and supermarket chains have relatively less bargaining power, although big buyers like Costco and McDonalds have clout. Fewer cattle and less meat is sold in openly competitive, transparent markets. There has been a greater shift in pricing power against farmers and ranchers on the input side than between packers and households.

The basic Packers and Stockyards Act to preserve competition and protect farmers was a Progressive Era bill passed in 1921 with few changes since. But the act’s bans on packing plant operators owning feedlots and USDA requirements to publish market prices are now obsolete due to contracting relationships and moves away from pricing live animals by the pound. The econ lessons here could be a column of its own.

Yet, if high prices are due to middleman gouging, why now? Why not, for example, when consumer meat prices fell sharply from July 2015, to January 2017?

The answer is farther down the food chain. Complainers ignore the obvious: Prices of corn and all other feedstuffs are sharply higher. Every farm kid learns that “cheap corn brings cheap hogs.” In other words, don’t over celebrate a bumper corn crop, because corn prices will fall and thus hog production will increase. Months later, the market price of hogs will be low due to oversupply. But the process works in reverse when feed prices are high. High corn prices, driven in part by war in Ukraine, one of the world’s most important grain-growing nations, make it more expensive to feed out cattle.

Feeders won’t do it unless the price of what they sell also goes up. This competitive, market-driven adjustment does not work perfectly or instantaneously. But it does happen inexorably. The price of corn and all other feedstuffs has fallen from the panic highs in May 2022, but corn remains more than twice as expensive now as at the end of May 2020.

Intro econ students learn that the “supply curve” for any producer — the list of the quantities offered for sale at each of a wide range of prices — is the same as the “marginal cost curve” for that producer. If the money a producer can get selling one more unit of their product doesn’t equal the extra costs to produce it, they won’t make and sell any more.

Then consider how this all is complicated by time lags. Ranchers decide how many cows to breed long before one year’s crop of calves is ready to sell to a feedlot. To order seed and other inputs, grain farmers must decide in winter what acreages they will plant to each crop in the spring. They can hedge the price at which they sell, but output still depends on weather. Feedlot operators must buy feeder cattle months before these will be ready to sell. So adjustments take time, but they do occur.

Moreover, there are some apparently perverse patterns in livestock production, interestingly mimicked in professions such as aeronautical engineering.

When beef prices rise, ranchers want to increase production. Doing so means not culling older cows that otherwise would be slaughtered. It means not selling as many young cows for meat because you need them in your breeding herd. Both reactions cut the short-term flow of cattle to slaughter. This accentuates the price rise. Based on an annual cycle in ranching areas and a nine-month gestation period, beef prices rise for a couple of years.

Then, when new capacity increases the numbers of fat cattle slaughtered, prices fall. Ranchers look at dropping prices and cull more old cows and hold fewer young replacement cows back from being fed out. So extra animals are dumped into the market, accentuating the price fall.

Now, the analogy: In the 1960s, when the space race and Cold War stoked demand for engineers to design new fighters, bombers and rockets, salaries for aeronautical engineers roared past those for civil and ordinary mechanical engineers. So hordes of young nerds crowded into aeronautics. But it takes four years to graduate. Just as the hordes were getting their diplomas, the moon program ended, the Vietnam war petered out and defense contractors slashed hiring. Aero grads ended up getting MBAs, going to seminary, teaching high school physics and so on. But, after a few years, the dearth of new grads pushed starting salaries back up.

The “beef cycle” of seven years or so is matched by a shorter-term hog cycle driven by quicker gestation and maturation periods. But “beef” has another kicker. The meat we eat can come from male steers and female heifers raised for meat, but it can also come from dairy herds. This doesn’t work for pork.

To lactate, a cow must have a calf every year. Some of the female calves must be raised to maturity to enter the milking herd themselves. But when they do, the cow they replace goes to slaughter. So too, after feeding, do the female calves not chosen as replacements. And with artificial insemination, so too do all but a tiny fraction of bull calves born. So young and old animals from dairy breeds make up a big chunk of the total beef supply, even if not all destined to be prime steaks.

There are about 89 million bovines of all ages and sexes in our country. About 38 million are females that have had at least one calf. Of these, 29 million are beef cows and the rest dairy animals. But, except for deaths due to illness or injury, virtually every cow eventually is slaughtered and the meat eaten.

A cyclical factor even enters into this. When milk prices are high, dairy herds expand, retaining older cows and holding more female calves back as replacements. This cuts the flow of animals from the dairy sector, contributing to a temporary uptick in slaughter cattle prices. The reverse sets in when milk prices fall.

So these cycles within the cattle industry itself interact with one-time factors. And there are cost factors outside the ag sector. Cattle spend a lot of time in trucks, from ranches to feedlots and from feedlots and farms to slaughter. Diesel prices are high. Fewer people want to drive semis. So trucking costs are higher at all levels of beef production. And, in a tight labor market, fewer people want to work on the kill floors of meat packing plants. So corporate greed is not acting alone.

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