Over a 30-year period ending in 2000, the U.S. beef cow inventory fell 8.4%, yet inflation-adjusted prices for 500- to 550-lb. feeder steers fell by 33.6%. But why in a supply/demand world would this price drop occur at a time of falling cow inventory?
Cow/calf producers operate in an economic environment characterized by cycles in feeder cattle prices and beef cow inventories. From 1970-2000, U.S. beef cow inventory fell from 36.7 million head to 33.6 million head. Meanwhile, real feeder steer prices (500-550 lbs., Oklahoma City) declined from $88/cwt. to $58.43/cwt. in inflation-adjusted dollars (Figure 1). This precipitous price drop affected ranchers' management decisions in areas such as genetics, financing and marketing as they struggled to remain economically viable.
Numerous factors caused the long-term decline in real feeder prices, but they generally encompass the fundamentals of demand and supply. Of course, other factors such as weather or political decisions can be important.
Two factors influencing feeder cattle demand are consumer beef demand and meat packer demand. These demand levels determine the economic health of the cattle feeding industry.
Backgrounding profitability also affects feeder demand. Meanwhile, the factors influencing feeder cattle supply include the costs of producing calves and imports of feeder cattle, primarily from Mexico.
A recent statistical study evaluated the demand and supply factors that determine levels of real feeder steer prices (750-800 lbs., Oklahoma City). This price weight range reflects backgrounded cattle ready for finishing.
A number of market factors were studied. These included slaughter steer price, corn price, feeder cattle supplies (including Mexican feeder imports), finance cost (interest rate), feedlot profit risk, feedlot technology and beef cow productivity.
Generally, increases in slaughter cattle prices and cost savings from feedlot technology increase feeder price. Meanwhile, increases in the other factors decrease feeder price.
The past 20 years reveal trends in these variables that could have affected feeder prices. From 1980-2000, real (750- to 800-lb.) feeder steer price declined from $81.78/cwt. to $62.53/cwt., or $19.25/cwt. (23.5%). The market factors accounted for $18.57/cwt., or 96.5% of this decline.
The following discussion focuses on changes in the demand and supply factors from 1980-2000 and their effects on feeder cattle prices. The numerical effects are also given in Table 1 on page 6-BF.
- Slaughter steer and corn prices
The largest single reason for the long-term decline in feeder steer price is the 34% decline in real slaughter steer price. This caused a $33/cwt. decline in feeder price.
Many analysts indicate the long-term decline in consumer beef demand (beginning in the late 1970s) and increases in dressed weights of slaughter cattle (domestic and slaughter imports) led to the slaughter price slide.
Real (inflation-adjusted) corn price declined by about 60% over this period, primarily as corn supplies increased relative to corn usage. This resulted in a partial offset to the slaughter price decline (by increasing feedlot demand), increasing feeder steer price by about $11/cwt.
- Feeder supplies and Mexican imports
Based on the U.S. beef cattle cycle (Figure 1), feeder cattle supplies declined 12% from 1980 to 2000. This added about $12/cwt. to feeder price as smaller calf crops reduced stocker/feeder supplies available for backgrounding and finishing.
However, imports of Mexican feeder cattle utilized by backgrounders and finishers (primarily in the South) increased over this period from 332,000 head to 1.22 million head. This jump increased imports' share from 1% to about 4% of U.S. feeder cattle supplies.
Table 1. Changing market factors and impacts on feeder cattle prices, 1980-2000
Percent -51.1% +16.9% +18.6% +1.8% -4.2% +9.6% -20.4% -3.6% $/cwt. -$32.84 +$10.84 +$11.99 +$1.17 -$2.70 +$6.14 -$13.13 -$2.30 Note: Under Factors Changing, percentage changes (plus or minus as shown in parentheses) represent trends in market factors from 1980 to 2000. Under Feeder Price Response, the response of freeder cattle price to these changes is given in percent and $/cwt. terms.
Increasing Mexican cattle inventories, the reduction of trade barriers and utilization of U.S. feedlot capacity accounted for the import increase. The result was a $2.30/cwt. reduction in feeder cattle price.
- Finance cost
Money interest rates adjusted for inflation impact feeder cattle prices since they affect carrying costs from feedlot placement to finishing. However, their price effects are quite small.
Statistical analysis indicates a 1% increase in the U.S. prime interest rate (which affects rates on agricultural loans) decreases feeder price by less than 1/10 of 1%. However, interest costs for individual feedlots can represent up to 18% of total cost of gain. The 46% drop in real prime interest rates from 14.4% in 1980 to 7.8% in 2000 resulted in increasing feeder price by less than $1.20/cwt.
- Feedlot profit risk and technology
Profit risk for feedlots is difficult to measure. Agricultural economists, however, often use the ratio of fed-steer price to corn price as an approximate measure of finishing profitability. The greater the variation in this output-input price ratio, the greater the profit risk facing feedlots. An increase in feedlot risk usually reduces the demand for feeder cattle placements.
For individual lots, forward pricing through futures and options can manage price risk, but basis risk still occurs. The data show that feedlot profit risk increased 26% from 1980 to 2000, which contributed to a $2.70/cwt. decline in feeder price.
Statistical analysis indicated that increases in feedlot technology led to increases in feeder cattle prices. Developments such as increased mechanization and health and nutrition management can result in a lower per pound cost of gain.
These technology changes have been commensurate with increasing feedlot size. Feedlot size may be price-neutral, or size may result in large feeding firms exercising market power and decreasing cattle prices. Alternatively, firms may pass on technological cost savings to feeder suppliers through increased price bids.
The latter appears to have occurred. Marketings from large feedlots (32,000 head or greater) as percent of marketings from all feedlots increased from 10% in 1980 to 47% in 2000. This resulted in nearly a $6.15/cwt. increase in feeder steer price.
- Beef cow productivity
Beef cow productivity here represents carcass pounds of beef produced/breeding cow. Adjustments are made for imports of Canadian and Mexican cattle destined for U.S. slaughter.
U.S. cow/calf producers have increased beef cow productivity from 496 lbs. in 1980 to 677 lbs. in 2000 (36%). It's attributed to improved breeding genetics, feed nutrition and other management practices that have increased calving percentages and weaning weights.
The downside is that the increased beef tonnage was marketed at lower prices. Holding beef demand constant, results show that the weight increase contributed to about a $13/cwt. decline in U.S. feeder cattle price.
The Bottom Line
Changes (or risk) in feeder prices are subject to many factors. Some producers manage price risk through contracting and futures markets. Others engage value-based and product-niche markets to improve their net price positions.
Long-term changes in cattle prices depend heavily on factors influencing consumer beef demand. Other factors include production costs, technology changes, processor and retailer competition, and exports and imports.
Demand improvement, besides requiring economic growth, necessitates consistency between cattle genetics and consumer preferences.
Consumer demand is a major factor affecting the prices packers are willing to pay for slaughter cattle. To negate the $13/cwt. feeder cattle price drop from 1980-2000 due to increased beef cow productivity, for example, consumer beef demand would have had to increase to the point of raising real slaughter cattle price by 14%. That's not a trivial change considering that slaughter price declined by 34% over that period.
John Marsh is a Montana State University professor of agricultural economics in Bozeman.