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$5 beef vs. $5 gasoline

Cattle prices are riding high: Finished steers are making $120+ cwt, for example. Prices like these have been buoyed by strong demand in the last year. Even though the trend has yet to turn lower, there are signs the bullishness may fade this summer, one economist says.

Despite a rise in production, demand -- at home and abroad -- continues to keep the markets surging, says Purdue University Extension livestock economist Chris Hurt. More U.S. consumers are buying more beef, and exports remain at a steady clip, he says.

"Since September 2010, the industry has exported a larger volume of beef than   imported -- a rare historical event," Hurt says. "This means more beef is flowing out of the country than into the country so consumers have to pay higher prices for more limited supplies. So, while total beef production is up about 1% this year, the amount available for U.S. consumers is actually down about 2% because of the impacts of trade."

But, a slow decline in domestic consumer demand, coupled with climbing retail prices -- for both beef and other consumer goods -- could send prices lower soon.

"It is likely that retail beef prices will move toward $5.00 per pound at times in coming months as retailers pass along the much higher prices of wholesale beef from this spring," Hurt says. "This will come at a time of severe pressure on household budgets as $4.00+ gasoline and $5.00 beef have the potential to force adjustments in consumer behavior."

But, high summer gas prices could actually boost domestic beef demand, says Kevin Penner, livestock market analyst with in Clive, Iowa. Grilling a $10 steak versus buying $500 worth of gasoline to take a family vacation could prove to be a favorable scenario for summer beef demand.

"If gas is $4 or $5 that will curtail the number of summer drivers and also likely reduce the amount of vacations/long weekends. If a family can't drive to Chicago to watch the Cubs maybe they stay at home and grill steaks and listen to game on radio?" Penner says. "It is a component that would be hard to track statistically but it is a likely scenario. $5 beef at the counter may deter some buyers but $500 worth of gasoline all of a sudden makes a Saturday afternoon home grilling t-bones seem cheap."

One thing that will remain a factor, regardless of demand, is feed prices. Right now, buying feed is no picnic as corn prices continue to surge. And, Hurt says though it may not seem like it with the current corn market, now's a good time to get some feed supplies priced.

"There is no sign that cattle feeders (or any other livestock producers) have backed down on corn consumption plans for this summer. There remain major questions regarding just how much old crop corn is available, about how high gasoline prices could impact corn demand for ethanol, and how foreign buyers will respond if corn availability becomes even tighter. To these concerns we can add a slow start to the 2011 planting season and escalating new-crop corn prices," Hurt says. "Overall, much higher cattle prices than historic norms are expected in coming years. However, producers should secure feed supplies for this summer and continue to manage margin risks very closely."

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