K-State Research & Extension Cattle Outlook James Mintert, Ph.D. Professor & Extension Ag....

K-State Research & Extension

Cattle Outlook

James Mintert, Ph.D.

Professor

&

Extension Ag. Economist, Livestock Marketing

Department of Agricultural Economics

Kansas State University


Issues

Farm Policy Seasonality in Steer Feeding Cattle Cycle Weights Cattle On Feed & Placements Trade Demand


For Updated Livestock Marketing Information Visit

The

K-State Livestock & Meat Marketing Web Site

www.agecon.ksu.edu/livestock


“This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…”

Senator John B. Kendrick of Wyoming

(1919)


Johnson Amendment Unlawful for meatpackers to own, feed or

control livestock for more than 14 days prior to slaughter.

Coops exempt » if a majority of the ownership in the coop is

held by active members who own, feed or control livestock and provide them to the coop for slaughter.

Packers that slaughter less than 2% of annual slaughter of each type of livestock are exempt.


Control Controversy

Harkin-Grassley Amendment » Unlawful for packers to own or feed livestock directly

through a subsidiary or through an arrangement that gives the packer operational, managerial or supervisory control over the livestock or over the farming operation that the producer is no longer materially participating in the management of the operation with respect to the production of the livestock


What Does It Mean? Conflicting Legal Opinions Tremendous uncertainty about what type

of business arrangements would be legal Some lawyers believe that virtually all

strategic alliances and marketing agreements between packers and producers will be deemed illegal

Likely that “material participation” will be settled on a case by case basis


Packer Concentration Increased Dramatically

Source: USDA & Sparks Co., Inc.


Concentration Driven By Cost Considerations

Historically, gross profit margins have been about the same for all major meat packers

Differences in profitability across firms was attributable to differences in costs

Low cost firms came out on top

Economies of size in slaughtering and fabrication were very large(Sersland, Duewer & Nelson; McDonald; Paul)


Vertical Integration Attractive To Investors Because Packer & Producer Profits

Negatively Correlated

Source: Sparks Co., Inc.


Same Story In Beef Except Correlation Is Not As Strong

Source: Sparks Co., Inc.


2001-2002 Isn’t The First Time Cattle Feeders Have Lost A Lot of

Money


Late Spring & Summer Placements Tend To Be More Profitable & Carry

Lower Risk


Seasonality of Prices & Performance Has A Big Impact On Profitability


Liquidation Has Been Underway for 6 Years

U.S. Cattle Inventory Growth Rate1925-2001

-10

-8

-6

-4

-2

0

2

4

6

8

10

25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00

Year

Percent

Source: USDA & KSU


Resulting In Yet Another Herd Reduction

Current inventory is about 27% smaller than in 1975

U.S. Cattle InventoryJanuary 1, 1925-2002

50

60

70

80

90

100

110

120

130

140

25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00

Year

Million Head

January 1, 2002 = 96.7 Million Head .

0.6% Less Than . on Jan. 1, 2001 .

Source: USDA


Average Cattle Cycle Is About 10 Years

But Current Cycle Just Completed 13th Year

Cattle Inventories By Cycle .

75

85

95

105

115

125

135

1 2 3 4 5 6 7 8 9 10 11 12 13Year of Cycle .

Cattle Inventory (Million Head) 1949-1958

1958-1967

1967-1979

1979-1990

1/1/02

Source: USDA & KSU


When Will Cow-Herd Expand? Forage Availability Will Be Critical

Estimated Cow-Calf Returns .

-100

-50

0

50

100

150

200

250

300

75 77 79 81 83 85 87 89 91 93 95 97 99 01

Year

$'s Per Cow

.

Source: K-State Research & Extension Returns ABove Variable Costs


But A Smaller Herd Doesn’t Necessarily

Mean Smaller Production

Beef Production vs. Cattle Inventory

0

5

10

15

20

25

30

50 55 60 65 70 75 80 85 90 95 00

Year

Beef Production (Billion Lbs.)

70

80

90

100

110

120

130

140

Cattle Inventory (Million Head)

Beef Production

Cattle Inventory

Source: USDA


Heavier Carcass Weights Tell The Story


Weights Have Been A Big Problem In 2002

But Have Declined More Than Usual Since January

Weekly F.I. Steer Dressed Weight

755760765770775780785790795800805810815820825830835

5-Jan 2-Mar 27-Apr 22-Jun 17-Aug 12-Oct 7-Dec

Date

Pounds per head 2001

2002

5 Yr Avg

Source: USDA & KSU


KANSAS FEEDLOT CLOSEOUTSAvg. Daily Gain, Steers

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Pounds

Avg. 1996/00 2001 2002

04/03/02

Weight Increase Not Because of Feedlot

Performance


KANSAS FEEDLOT CLOSEOUTSAvg. Days on Feed, Steers

120

130

140

150

160

170

180

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Days

Avg. 1996/00 2001 2002

04/03/02

Longer Feeding Periods Are The Problem


Negative Basis Structure Encouraged Feeding To Heavier

Weights


But Basis Structure Has ChangedWill It Lead To Shorter Feeding

Periods?


Will Weight Decline Extend Into May?


Cattle On Feed Below A Year Ago, But Still Large By Historical

Standards


And Placements Rose During February


Placement Increase Focused On Heavy Cattle

Which Will Be A Problem By Late Spring

Year-To-Year % Change in Placements on Feed U.S. & Canada Combined, By Placement Weight

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

LT 600# 600-699# 700-799# 800# Plus Total

Placement Weight Category

% Change From Previous Year Last 90 Days Last 120 DaysLast 150 Days Last 180 Days

Placements Through Feb., 2002


Non-Fed Slaughter Below A Year Ago

But Beef Cow & Calf Slaughter Up In Late March


Small Placements Last Fall Pushed Slaughter Pace Below 2001 During

March


But Heavy Weights Kept Production Pace Up


Long-Run Beef Export Growth Has Been Phenomenal

U.S. Beef Exports .

0.0

0.5

1.0

1.5

2.0

2.5

3.0

61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

Year

Billion Pounds

.

Source: USDA .


And The Gap Between Our Imports & Exports Has Narrowed

Dramatically

U.S. Beef Imports & Exports .

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

Year

Billion Pounds

.

Beef ExportsBeef Imports

Source: USDA .


U S BEEF, VEAL, & LIVE CATTLENET IMPORTS

Animal Equivalents, Annual

-500

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Thou. Head

Total Mexico Canada

Net Imports Up RecentlyBut Still Far Below Early 1990’s

Source: LMIC


Weak Economies In Importing Countries & BSE In Japan Mean Exports Will Be Weak In

2002

2001 U.S. Beef Exports Market Share By Country

CANADA10%

MEXICO24%

JAPAN44%

S. KOREA15%

OTHER6%

CARIBBEAN1%

Source: USDA & KSU, based on quantity shares


January Exports Down 1.8%


Exports To Japan Down 33% vs. Prior Year From November Forward


Summary

2002 annual beef imports up 1 to 3%

2002 annual beef exports down 3 to 5%

Weights will continue to decline

» but remain above last year through summer

U.S. beef production above 2001 until fall

» Annual total near 2001 level


Best News In

Beef Industry

In 20 Years


Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001

Beef Price Quantity RelationshipsAnnual, 1980-2001

80

81

82

83

8485

86878801

00

89

275

300

325

350

375

400

425

450

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80Per Capita Consumption - Retail Weight .

Deflated Beef Price - Cents per

Lb

Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999=100

94 95

93

90

92

91

9699

9897


Another Look At Demand

Compute a demand index

The index accounts for changes in beef quantity

The index relates current beef prices to prices expected if demand was held constant at some prior year’s level


Domestic Retail Beef Demand Is Improving

Retail Choice Beef Demand Index88 86

8379 76

70 6966 65 63 60 59 57 56 54 52

58

51

94

5553

0

10

20

30

40

50

60

70

80

90

100

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Year

Index Value

Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

Retail Choice Beef Demand Increased 5.3% during 2002


Cyclical Peak In Slaughter Cattle Prices Still

Ahead

Annual Average Steer Prices .W. KS 11-13 Cwt. .

35

40

45

50

55

60

65

70

75

80

85

75 77 79 81 83 85 87 89 91 93 95 97 99 01Year .

Ste

er

Pri

ce (

$/C

wt.

)

.

Source: USDA


But This Year’s Average Will Be Near Last Year

Year & Quarter Kansas Slaughter Steer Price

70.71

70-73

67-70

72-75

70-72

2002.1

2002.2

2002.3

2002.4

2002 Avg.


Futures Anticipate A Decline To The Mid-$60’s This Summer


Are Futures Oversold?


2002 Feeder Cattle Prices In Low to Mid-$80’s, Strongest Prices In Last Half of

Year

Dodge City 7-8 Cwt. Annual Average Steer Prices .

30

35

40

45

50

55

60

65

70

75

80

85

90

95

75 77 79 81 83 85 87 89 91 93 95 97 99 01

Year

Ste

er P

rice

($/

Cw

t.)

.

Source: USDA


Declining Corn Prices Helped Boost Feeder Cattle Prices Since Mid-

1990’s

Kansas Monthly Corn Prices

1.251.501.752.002.252.502.753.003.253.503.754.004.254.504.755.00

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

YearSource: Kansas Ag. Statistics-USDA

1985-1989 Average = $2.23/bu.1990-1994 Average = $2.40/bu. 1995-1999 Average = $2.65/bu.


Feeder Futures Suggest High $70’s Low $80’s Trade

But Grain Prices Will Be Important


Are Feeder Futures Oversold?


Summary1. Cow-Calf Producers In Drivers Seat

2. Tougher For Margin Operators

• Cattle Finishers Still Losing $ This Winter Profits Could Prove Elusive Until Fall

3. Long-Term Outlook

• Cyclical Peak In Cattle Prices Is Still Ahead

• Major Risk Is Beef Demand

• Domestic Beef Demand Rebounding More Quickly Than Export Demand


For Updated Livestock Marketing Information Visit

The

K-State Livestock & Meat Marketing Web Site

www.agecon.ksu.edu/livest

ock

K-State Research & Extension Cattle Outlook James Mintert, Ph.D. Professor & Extension Ag....

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