The year 2000 was suppose to be the year cattle producers started rebuilding cow herds, cutting beef supplies sharply as heifers entered cow herds instead of feedlots. As a result, most analysts had prices improving based on the beef supply turn around. Cattle prices improved but not because of the anticipated supply cut. Instead, fed cattle prices during the first of 2000 averaged more than $6/cwt. higher than the first half of 1999. This despite more than 2% more beef hitting the streets. If fact if 2000 plays out as expected, commercial beef production as well as fed cattle prices will have shown year-over-year increases for 14 straight quarters.
 

Right For the Wrong Reasons - Beef Demand Improves but for How Long?

The apparent improvement in beef demand made most cattle price prognosticators right but for the wrong reasoning. Now the questions turn to the factors that turned beef demand after more than 20 years of decline. Was it the high protein diet, waning safety concerns, or a return of consumers desire for flavor in their diets. All these questions can be debated as we see if demand can hold in the face of some extremely large beef supplies scheduled to hit the next 60 days. If the apparent beef demand improvement of the last two years holds, beef producers may have even happier days in store. Because one of these days, cattlemen are going to hold some of those heifers and break the string of increasing supply.
 

Can and Improved Demand Meet a Declining Beef Supply - What about that Cattle Cycle?

 

If and when cattlemen return to a rebuilding mode, cattle slaughter could drop significantly. Most cattlemen ask how it is that we are marketing more cattle out of the 1990 cow herd. The reason is the large number of potential heifer replacements sent to slaughter. As of mid-year, there had been little movement toward herd rebuilding reported as the number of heifers held for replacements on July 1 numbered 2% fewer than last year. The number of heifers on feed on July 1 was also about 9% higher than last year's.

Beef Supplies For The Remainder of 2000 and 2001

Cattle on feed as of July 1 were 9% higher than July 1, 1999 in 1000 head lots, but only 7% higher when all feedlots are counted. The total numbers on feed combined with the cattle weights on feed suggest a lot of cattle to come to market over the next few months. Third quarter slaughter is projected to be .5% higher than last year's. Fourth quarter slaughter may come in slightly less than last year.

Feedlot placements were down 7% from 1999 with placements of heavy weight feeders down about 16%. Perhaps the reduced placements foreshadow the move to lower fed cattle numbers as producers begin to rebuild their herds, drawing heifers out of the feedlot mix. If 2001 christens a new cattle cycle, cattle slaughter for the year as a whole may be down around 5%, the first slaughter reduction in 3 years. Slaughter by the end of 2001 may drop below the 1993-95 average levels.

Heavy slaughter weights will moderate the drop in cattle slaughter. Weights are likely to be higher in the last half of 2000 and in 2001 with cheap feed and the prospects for it to get even cheaper. If cattle feeders begin to hold cattle longer with the hope of higher prices, weights could increase significantly. The ingredients for a 1997 style backlog is there with plenty of cattle on cheap feed, futures at a premium to cash, and lots of red ink on the books.

With weights remaining high, commercial beef production will not likely show a decline until the first quarter of 2001, despite a reduced slaughter in the fourth quarter. Commercial production is forecast to be about 1.5% higher in the third quarter of 2000 and slightly above 1999's fourth quarter production. Commercial production for 20001 would be around 5% lower than 2000's for most of the year with a cow herd rebuilding induced drop in cattle on feed.

Beef Imports and Exports

Beef exports through the first 5 months of 2000 are up more than 9% as compared to 1999 (Russia excluded). Exports to all major importing countries are up with Korea (+37%) and Mexico (+23%) leading the way. But, the major importer, Japan, has taken 1.5% more US beef and Canada has also brought in 9% more beef during the first of 2000. A fall in US beef exports has been projected each of the last several years but has not yet materialized. Imports of beef are also up more than 5%. But the trade of increased exports for imports is a positive for US cattlemen as high value beef is exported and lower value imported.

Mexican feeder calf imports are running around 40% higher than in 1999 for the first half of 2000. If maintained through the remainder of the year, Mexican cattle would add about 1% to the slaughter projected for 2001.

Beef exports and imports for 2001 are expected (once again) to decline marginally. Net commercial production is therefore expected to show no major difference with commercial production projections.

Fundamental Price Forecast

Under the supply and demand conditions outlined, fed cattle prices basis Western Kansas, are expected to remain under pressure from extremely large beef supplies for the next few months. However, if demand holds at close to the apparent levels of early 2000, fed cattle price will not sink much below the mid $60/cwt. range and will average about $67 for the third quarter.

Lagging fed cattle marketings would push prices lower than projected, setting up some spillover into feeder calf markets as cattle feeders work through $100/head losses. Baring this type of situation, feeder calf prices are expected to maintain historically large premiums to fed cattle prices in light of low grain prices.
 
 

Fourth quarter fed cattle prices are expected to recover some from the third quarter with fed cattle averaging about $71/cwt. Again, the apparent demand levels of 1999 must hold for prices to average this high given the expected production.

The first and second quarters of 2001 would bring lower $70/cwt. average prices with reduced production and some slippage in demand from the 1999/2000 level. With low grain prices, heavy weight feeders steers would be expected in the mid to upper $80/cwt. range with 500 lb. steer calf prices averaging $100/cwt. plus. How large or small the "plus" gets will be dependent on how hard producers go after rebuilding the cow herds.
 

Past cattle cycles suggest that the "good times" should last a few years for the calf producer. Thus the best advice for cattlemen seems to be to try and hold a good productive herd together through about 2003. Heifers added to the herd now, however, will have a tough time producing profits over their productive life. Past studies suggest that cattle feeders and stocker operators can make (or loss) money in the "high calf' part of the cycle, but the risk are great.

1. Presented at the Extension Outlook Session, American Agricultural Economics Association Annual Meeting, Tampa Fla., July 31, 2000

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