Prices continue strong for cow-calf producers. As of late August, the 2006 drought has had little impact on cattle prices, and drought-induced early weaning of calves promised to shrink the fall calf supply.
In addition, drought-induced cow culling appeared to slow herd expansion, while the resumption of U.S. beef exports to Japan has increased the hype in the feeder-cattle market. In general, consumer beef demand seems to be remaining strong.
As a result of all these factors, I'm revising my short- and long-run planning prices upward.
Long-run planning prices
Foreign markets will be a key to cattle prices over the next few years. With domestic meat and poultry production likely to post year-to-year increases, the question is whether overseas markets can absorb the supply.
A North Dakota State University study, entitled “Potential Effects on U.S. Cattle and Beef Prices from Reopening the Borders,” suggests that when U.S. beef exports to Japan return to their 2003 level, fed-cattle and feeder-cattle prices will rise $7.83/cwt. and $8.95/cwt., respectively, while retail price will jump 16¢/lb. I translate this into a $12/cwt. increase in 500- to 600-lb. feeder calf prices, the only catch being it could take 3-4 years to return to that pre-ban level.
My revised long-run planning prices incorporate a gradual return of that export market spread over that period. Figure 1 depicts my pre- and post-Japanese market opening projections. The net result is the upward adjustment of projected feeder-calf prices toward the end of this decade and the first half of the next.
This upward revision suggests the “U-shaped” beef-price cycle low for the last half of the current cattle cycle, and first half of the next, won't be as deep as earlier projected. In turn, this suggests considerably less financial stress for beef-cow producers over this period.
Figure 2 presents my revised suggested planning prices for 500- to 600-lb. and 700- to 800-lb. feeder steers, and fed-steer prices. The feeder-calf prices are fall-weaning prices; the feeder- and fed-cattle prices are annual average prices. These projected planning prices suggest we've indeed moved to a new price plateau.
Based on Figure 2, I suggest a $100 beef price cycle low for feeder calves, a $90 beef price annual low for feeder cattle and an $80 annual low for fed cattle. Remember, both feeder and fed cattle also have a seasonal price pattern around their annual prices. Astute managers use both annual long-run planning prices and annual seasonal planning prices to formulate their marketing and production decisions.
The vertical lines in Figure 3 represent the negative buy/sell margins for growing feeder cattle and finishing cattle. Given these wide negative buy/sell margins, post-weaning profits are projected to stay under considerable pressure.
With the bunk space added in the 1990s (Figure 4) and a smaller U.S. cattle herd, cattle feeding has become so competitive that feedlots typically overbid feeder cattle just to stay in business. Research has confirmed the average annual profit margin has been about squeezed out of cattle feeding. In any case, the wide buy/sell margins on growing feeder cattle and/or finishing cattle are projected to take their toll on post-weaning profits for 2006 calves.
We should see some price adjustments in the overall cattle-price scheme the rest of this decade. Feeder-calf prices will adjust down, or slaughter cattle prices up. As cattle feeders use up excess equity capital earned in 2003, feeder-calf prices will adjust.
Increased beef cow numbers nationally will drive this price adjustment, which should return to more sustainable profits in the post-weaning profit centers. What's less clear is how quickly the beef-cow herd will increase in this decade. I suggest the price adjustment might begin with the 2007 calf crop. It's now abundantly clear it didn't begin with the 2006 calf crop as previously predicted.
Short-run planning prices
I'd projected this cycle downturn in prices to begin in 2006. Prices did fall in the first half of 2006, but turned up the last half. The 2006 drought, return of the Japanese market, return of lower corn prices and continued strong beef demand contributed to this upturn. It now appears fall 2006 calf prices will be record high for the fourth consecutive year, giving beef-cow producers their fourth all-time record annual profits, which is unprecedented.
Regions that escaped the drought will be in full expansion, while drought-affected regions will focus on saving their core beef-cow herds. Together, this will lead to a slower overall herd expansion.
I predict drought-induced early cow culling will have a minimal impact on cattle prices because the U.S. import ban on Canadian cull cows limits the supply of grinding meat. Thus, the increase in U.S. cull-cow harvest will just replace some of the offshore beef imports, which hasn't been true in previous droughts.
My short-run price projections are heavily futures-market driven. A big concern is the potential for increased 2007-08 corn futures prices, which hint at possible $3/bu. corn. Figure 5 presents feeder-cattle futures prices as of late August, which suggest feeder prices remaining strong into spring 2007, with hints of some weakening through 2007. Figure 6 presents the late-August live-cattle futures; Figure 7 summarizes my current short-run price projections.
Figure 8 summarizes the projected management implications of my revised short-run planning prices. A typically well-managed beef-cow herd with an average 565-lb. weaning weight, selling at $143/cwt. for the steer calves, is projected to generate $346 pre-weaning profit/cow — an all-time record.
Post-weaning profits, however, are another story (Figure 8). Clearly, the cattle cycle's current phase favors pre-weaning profits over post-weaning profits. Where we are in the cattle cycle makes a difference.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or firstname.lastname@example.org.
Click below to view figures and tables.