Cattle markets expected to hold steady through the year
Douglas – According to UW’s State Livestock Marketing Specialist Bridger Feuz, the world economy and a shift in factors affecting the U.S. corn market have contributed to today’s undependable cattle cycle.
Feuz was present at the 2009 Wyoming Livestock Roundup and Double S Feeders Cattlemen’s Conference held in conjunction with the Wyoming State Fair in Douglas mid-August.
“The gross domestic product was going along pretty good, but since December 2008 we’ve taken a turn and that’s no surprise to anybody out there and it’s really affecting the cattle markets,” he said, noting that one part of that affect is coming from a falling restaurant index. “The restaurant industry is suffering, and it really helped support the beef industry.”
He cited steakhouses such as Outback Steakhouse that have begun to offer value steaks in an effort to bring customers in their doors.
“If we look at the current recession, and at recessions over the last several years, we can see it’s not unordinary to have recessions, but it is to have them this long and severe,” he said.
The last major contraction in the U.S. economy came in 1929 and lasted 43 months. The oil crisis in the early 1970s lasted 16 months, and another in the early 1980s lasted the same length of time.
“This recession began in December 2007, so we’re approaching 48 months,” said Feuz. “That gives you an idea of the economy today and why it’s driving the cattle markets so much. That’s why we’re where we are today.”
Although retail beef prices have begun to decline after holding steady through the first part of 2009, Feuz said it’s important to note that demand for beef began to decline before the onset of the recession.
“Beef demand in the U.S. was in a continual decline from the 1950s through 1998, and that changed through industry effort to improve demand through ad campaigns and Beef Quality Assurance,” he said. “The spike in beef demand in 2004 was due to dietary fads like the Atkins diet, which helped us, but since 2004 there’s been a steady decline in beef demand again.”
“That’s something we as an industry need to take a look at and realize the demand for our product had started to decline before the recession hit,” he added.
Compared to other protein sources, pork has stayed mostly even with a slight decline while chicken consumption has risen considerably since the mid-80s.
Another aspect with an affect on the cattle market in late 2008 was the value of steer hides and offal, which can add as much as five dollars per hundredweight per head.
“When we had the overall economic slowdown the rest of the world did, too, and the world export market for those products really declined, though it’s started to build back up to the average from 2003 to 2007,” said Feuz, adding the slight increase in beef exports has helped hold prices where they are this year.
“Late last fall we almost hit zero on the Choice/Select spread,” noted Feuz. “A lot of that is demand driven, in that people can’t afford the high priced meat.”
He said there still is a difference between Prime and Choice grades, and the branded versus Choice beef has held up well. “It’s maintained a five dollar difference pretty steadily, which is good news for those of you who have gone to a branded beef product.”
Of the recession’s future, Feuz said it’s hard to get any consensus on its length. “Most of us who are predicting cattle market prices would say we’re pretty close to the bottom right now and wouldn’t predict further decline next year due to the recession.”
While supply used to be easy to talk about with a quick reference to the cattle cycle, Feuz says it doesn’t work so well anymore. “We’ve been pretty flat from 2004 to 2009, and the theory I subscribe to as to why it doesn’t work like it used to is that corn has moved from a direct relationship in pricing with cattle to an energy-based pricing.”
Because of that, Feuz said producers have to change management to three-month time windows. “The cattle numbers have switched from long-term cycles to event cycles,” he stated, noting BSE, 9/11 and the recession as having effects. “Every one of those had major impacts on the cattle industry and changed the numbers, but they don’t follow a regular cycle. Producers have to have a shorter business plan now.”
Regarding the low cattle numbers, Feuz said the last time the calf crop was as small as 2009’s was in the early 1950s. However, he says producers are now turning out a lot more beef with fewer animals. “We’re still increasing the overall amount of beef in the U.S.”
He predicted the 2010 calf crop will be even smaller, as heifers held as replacements have fallen even more. Beef production is projected to decline through 2011, with a decrease in total meat production.
Feuz said feedlots, which were hurt badly with high corn prices, are starting to recover. Those who didn’t contract forward as aggressively are coming out of it more quickly because they’re taking advantage of the lower corn prices.
Feeder cattle margins have been negative since 2007, with feeders losing as much as $200 per head in 2008. While still negative, now the loss is down to around $40 per head. “The projections are that many of the cattle placed this fall will be fed near break-even, or with a slight profit,” said Feuz.
In exports, Feuz said Mexico has been a good trade partner and is now above pre-BSE levels. “Canada has slowly started to come up, but Japan and South Korea are still far below pre-BSE levels of trade.”
Although the export market took a dive through the end of 2008 and into 2009, Feuz said it’s starting to build back up, which will help the market going into this fall.
“Input costs are down from last year’s highs and although feeder margins are still negative, they’re expected to break even this fall,” he summarized. “The export market is key to maintaining current price levels and although the U.S. is a net beef importer in pounds, its value of exports exceeds the value of imports.”
He thinks this fall cattle prices will remain flat without much change, except for maybe a slight downward trend when the bulk of calves hit the market. “Going into next year, the forecast is for a slight increase in prices. We could be trading cattle at four or five dollars per hundredweight higher next fall. Any sort of economic recovery and a normal corn crop and I think those numbers will hold true.”
Christy Hemken is assistant editor of the Wyoming Livestock Roundup and can be reached at email@example.com.