1999 LIVESTOCK AND POULTRY OUTLOOK

Beef Cattle Outlook
Is There Hope For Hogs?
Broilers Production Increases But Profits Steady in '99

Last year, cattle producers suffered through a poor year and for hog producers it was one of their worst ever. But poultry producers had one of their better profit years in 1998. The culprit for the red meats -record large hog slaughter and record heavy cattle weights - making for a record large red meat supply. Poultry producers, on the other hand, had their smallest year-over-year production gain in 15 years thus contributing only slightly to the large meat supplies of 1998. The small increase in poultry production helped to hold poultry prices high in the face of the red meat onslaught allowing poultry producers to benefit from low feed prices.

Also contributing to the problems of meat producers was the fact that most of the increased U.S. meat production had to be absorbed in the domestic market. That caused record large per capita total meat and poultry consumption in 1998. After growing significantly in recent years, exports (on a tonnage basis) of U.S. red meat products to foreign countries grew very modestly in 1998

and sales actually declined for poultry. Also, weakness in Asian and other economies resulted in more beef, pork and lamb from other meat exporting countries (Australia, Canada, etc.) ending-up in the U.S. market than in recent years.

In 1998, cattle producers continued to liquidate breeding stock while hog producers started liquidation in the fourth quarter of the year. Total U.S. red meat supplies are forecast to moderate in 1999, most of the decline in the first half of the year will be from reduced beef output. But U.S. broiler production may post large year-to-year increases in 1999, resulting in only a slight decline in total meat and poultry supply.

Beef Cattle Outlook

Cow-calf operations struggled in '98. Even with tighter feeder cattle supplies due to the smaller calf crops of recent years, dismal cattle feeding returns reduced calf and yearling prices in the second half of '98. Cow-calf returns over cash costs were lower in 1998 compared to 1997. The largest losses in this cattle cycle were posted in 1996 for cow-calf operations.

U.S. cattle slaughter in 1998 was just over 2 percent smaller than in 1997. But record fed cattle sale weights resulted in just over 1 percent more beef produced. In 1999, the impacts of declining cattle numbers will become apparent on cattle prices. Commercial cattle slaughter in 1999 may post year to year declines of 4 to 5 percent. And if cattle weights moderate slightly, beef production will decline slightly more than slaughter.

A rather unusual factor contributed to year-to-year declines in 1998's fed cattle prices. Asian and then Russian economic turmoil reduced hide and other non-meat values significantly in 1998. In fact, on a per fed steer basis the decline was $2 to $3 per cwt. in 1998 versus most of 1997. Values of non-meat items that come from cattle are not likely to return to levels of a few years ago until the Asian economies fully turn-around.

Cattle prices are forecast to generally increase in 1999. As the year progresses, year-over-year cattle price gains will be larger-and-larger. Fed cattle prices for the year are expected to average in the upper $60's per cwt., compared to $61.78 for 1998. For calendar year 1999, calf and

yearling prices are forecast to average $4 to $6 per cwt. above 1998's. On a year-to-year basis, cattle prices will post their largest gains in the second half of '99. Calf producers will likely sell 1999 calves this fall quarter at the highest prices since 1993.

Returns for finished cattle are expected to return to the black during early 1999 with breakeven sale prices of about $60 to $62 per cwt. Cow-calf returns are forecast to improve in '99, and most low cost producers will post profits. Overall, cow-calf returns this year should be

the best since 1993.

Is There Hope For Hogs?

The last count of hogs and pigs across the country indicates that the worst hog prices since the great depression has speeded liquidation in the industry. Unfortunately, while prices may be considerably improved from the $10/cwt. prices producers received for Christmas, prices high enough to cover total cost will not likely return until the last half of 1999.

As of December 1, total U.S. hog numbers were up by 2% as compared to last year but 2% below September numbers. The pork factory or breeding herd was 4 % lower than last year while market numbers were 2% higher than last year. Georgia hog numbers were down 17% and the count of hogs in the state now stands at about one fifth the levels of 1980 and one third of the 1990 count.

If the latest hog inventory is to be believed, market hog prices will move back into the $30/cwt. level by late winter. Prices will quickly recover into the $20/cwt. range in early January as market numbers drop in line with slaughter capacity. The severe price depression of November and December 1998 was caused by a lack of places to kill all the hogs ready for market. Recent U.S. packing plant closures, labor strikes in Canada (pushing Canadian hogs south), and the holidays all contributed to the backup of hogs at slaughter plants. As hogs backed up, weights got heavier further contributing to the price free-fall. If there is a silver lining in the situation, it is that pork demand has remained strong. The extremely large supplies of pork are moving through retail at only slightly reduced retail prices. This means that farm level prices can recover quickly if numbers drop into the range that can be killed by U.S. packers in a normal work week.

Prices may reach the upper $30 to low $40/cwt. range by the last half of the year if the breeding herd reduction continues. $40/cwt. prices will be marginally profitable for efficient producers with low feed cost. But the hog price disaster of 1998 will require many years of profitable prices for producers to recovering their 1998 losses. For those that are able to survive the near term, the likelihood of a long string of industry profits looks probable.

Broilers Production Increases But Profits Steady in '99

Due in part to industry planning, in part to weather, and in part to disease problems in the breeding flocks, broiler production during 1998 registered its smallest percentage growth since 1982 at 27800 million pounds or approximately 2% more than 1997's production. Just as companies planned to hold the line on production during the first of 1998 in response to tight margins in prior years, the summer's heat cut into production even more. By late summer wholesale broiler prices were in the $70's. Profits were augmented even more as feed prices dropped some 20% below their 1997 levels. The results - some of the best industry margins in recent years.

USDA projects 1999 production to return to the 5% growth trend of the last 10 years. In light of the profitability experienced in 1998 and with feed cost looking to be at the lowest levels of the past 4 years, it would be hard to imagine the industry holding the line on production. If not for disease problems in the breeding flocks, odds would favor a 1998 production increase in the 6%-7% range. However, it may not be possible to reach even a 5% growth in 1999.

To some extent, the 1998 broiler demand situation was reversed from 1997's. Strong domestic fast food demand pushed boneless breast meat and wing prices up some 20% from 1997's levels. At the same time, a sluggish export market filled with large supplies of competing meats pressured dark meat prices. 1998 exports failed to met expectations as the largest broiler export market (Russia) collapsed and financial crisis in other countries limited demand. Large production in the other meats also limited broiler export appeal leaving 1998 broiler exports about 4% lower than in 1997.

1999's exports will likely show little growth over 1998 as the Asian and Russian economic crisis and large competing meat supplies limit export growth opportunities. In fact, broiler exports may fall again in 1999. Since exports represent about 18% of domestic production, export conditions will be key to broiler prices over the next year.

Wholesale broiler prices averaged about 63 cents per lb. in 1998, about 4 cents higher than in 1997. Prices are expected to remain above year earlier levels through the first part of 1999. By the second quarter of 1999, broiler prices are likely to fall behind 1998's pace by 2 to 4 cents per lb. For the 1999 year as a whole, broiler prices are expected to average around 59 cents per lb. While 1999 broiler production returns will not be as large as those experienced in 1998, they will remain comfortably in the black provided feed cost continue at low levels.

John C. McKissick

Professor and Extension Economist - Livestock