If you were to focus on the 6% increase in beef production in 2006, you might think the cattle market is poised for a major correction. However, according to Randy Blach, executive vice president of Cattle-Fax, the market has held its own this year.
"We've seen fed slaughter increase 800,000 to 900,000 head this year over last year and production is up 6%. Yet fed-cattle prices are only going to end up $1.50 to $2 lower than they were a year ago. So we've gotten along very well," Blach told members of the Texas Cattle Feeders Association (TCFA) and Texas and Southwestern Cattle Raisers Association (TSCRA) at their joint meeting in mid-October.
The reason fed-cattle prices have held up reasonably well in the face of higher supplies is demand, both domestically and internationally.
Blach says aggregate beef demand in the U.S. has been a little softer this year. "But I think it's important that we step back and look at what's really going on," he says, explaining, "Demand is growing for Choice, the upper two-thirds of Choice, Prime and beef sold in many branded-beef programs. Choice price is higher even though Choice beef supplies are up 2% for the year. So we're not seeing the same softening in demand on the higher quality products that we’re seeing in aggregate."
On the international front, Blach says the trend toward regaining lost export markets continues to be important.
Regarding the drought situation, he says we have definitely slowed the rate of expansion on the nation’s cow herd. "It looks like cow numbers will be up 1% in 2007. Fed cattle slaughter will likely increase another 500,000 head in 2007 and beef production will increase about 2% for the year compared with 2006," he projects.
Fed-cattle prices in 2007 will be slightly softer, but not significantly different from what cattle feeders experienced this year. "We'll still end up averaging $84 to $85 on fed cattle in 2007 and have a practical range from the low $90s to the upper $70s," he predicts.
"I would look for a more significant price correction on feeder cattle and calves," he says. "A lot of that will be attributed to higher grain prices along with shrinking margins and loss of equity we’ve experienced at the fed-cattle level."