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Livestock Prices: The Top 10 Most Important Drivers

Published 03/08/2015, 09:16
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1) Feed prices

If feed grain prices increase (so that total input costs rise) the cost of raising livestock also goes up, reducing margins for farmers. Rather than feed cows, pigs and chickens at flat to negative operating margins, livestock owners may opt to slaughter more of their herd instead.

This then supplies the market with excess meat and drives prices lower in the short-term. In the long-term, equilibrium in operating margins is restored by either greater supply of feed grains driving input prices lower or decreased livestock production increasing market prices.

Conversely, if feed prices decline, it costs less to feed livestock for each additional pound of gain. This lower cost makes it more profitable to continue feeding animals longer and thus creates a short-run reduction in livestock supply. The expected long-run increase in supply will not appear for a time equal to the length of the feeding period for each animal.

When feed prices decline, livestock feeders buy more young animals to increase their feeding herd size. However, not until these animals are fed to slaughter weight is the increase in supply realized.

2) The weather

High temperatures affects livestock’s appetite, reducing the weight that they gain and extending the time it takes to get them to slaughter weight. Heat stressed livestock are also less likely to produce fewer offspring, thereby affecting the future size of the herd.

By extension the weather can also affect the supply of livestock and products derived from them. Food items with a shorter shelf life and fast production times are particularly vulnerable. High temperatures means stressed out cattle and poultry and results in less milk being produced and fewer eggs.

Drought also reduces the availability and quality of pastureland, also reducing the amount of feed for grazing livestock.

Any extreme weather conditions can be harmful. Very cold winters can be particularly dangerous for young cattle, reducing future supplies of Cattle while also slowing the rate of weight gain among the remaining cattle.

3) Income growth

The demand for meat is closely linked to a country’s economic development with richer consumers generally consuming a greater amount of meat in their diets. Urbanisation and rising incomes mean that more of the world is converging on European and American levels of meat consumption, which is roughly 100 kg a year. At the moment, most of Africa and South Asia eats less than 20 kg of meat a year.

Although meat demand generally has a positive relationship with income growth, not all meats respond in the same way. For example, if income increases, the demand for more expensive cuts of meat, such as steaks, may increase while the demand for less expensive products, such as ground beef, may decrease.


4) Substitutes

Since chicken and pigs convert 1 kg of feed into 2-4 times as much body mass than a cow, it makes producing poultry and pork less expensive than beef. A rise in the price of beef may encourage consumers to switch away from beef towards cheaper meats like chicken and pork, thereby reducing demand for cattle, but increasing demand for chicken and pigs.


5) The hog cycle

In general, cattle prices follow a broadly predictable pattern known as the ‘hog cycle’ lasting around 10-12 years (a similar pattern is observed in other forms of livestock). Increasing cattle prices spur producers to retain female animals to increase the breeding herd, initially reducing slaughter numbers and as a result, prices increase even further. However, once these female animals begin producing offspring and eventually reach slaughter weight, there may be an oversupply of livestock.

Prices then begin to decline and it eventually becomes unprofitable to raise and feed young cattle. Producers then begin culling the breeding herd and sending them to slaughter, adding additional numbers to supply and causing prices to decrease even further.


6) Disease

A disease outbreak can be devastating for livestock supply. Even in an outbreak where livestock can be treated the medication used may require a withdrawal period before slaughter, delaying the time at which livestock can come to market.

7) Energy prices

The price of energy affects the cost of running a farm and indirectly the number of cattle that the farm can support. The most obvious impacts is on the price of diesel, used to run machinery and transport while propane is often used to dry grain and heat livestock buildings. Indirectly the price of natural gas is a key determinant of fertiliser prices which may affect the price of feed.

In addition livestock also compete with ethanol production for available corn supplies, so an increase in the price of oil may lead to an increase in ethanol demand, further boosting demand for corn away from livestock.


8) The US dollar

Like most internationally traded commodities livestock are priced in US Dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.

Unlike many other commodities livestock prices (live cattle and lean hog futures) only has a small inverse correlation against the dollar with of around -0.2 with the previous nine factors appearing to be much more important in determining Sugar prices.

9) Seasonal trends

Seasonal periods can clearly and predictably result in changes in tastes and preferences. For example, there is increased demand for certain cuts of meat during the summer (more pork and beef) because many people enjoy BBQs. Similarly, at Christmas the demand for turkey increases while the demand for pork and beef decreases

The supply of livestock is highly seasonal too. For example, most cattle herds are bred in late summer and after a 9 month gestation period, produce a spring calf crop. Most producers breed their herd to calve in the spring to avoid the harsh weather of winter and to assure abundant forage for the new calves during their first few months.


10) Consumer preferences

For health, moral, environmental or for other reasons demand for meat, or certain types of meat may reduce over time. In contrast to the impact of changes in price on demand for substitutes, changes in consumer preferences results in much longer term changes in demand.

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