Cattle-Fax: Profits to deteriorate in 2005

Cattle Market & Farm Reports, Editorials
Feb 21, 2005
by WLJ
An expected ramping up of slaughter volume this year is expected to result in cattle feeders’ struggling to show profits throughout 2005, according to a cattle market analytics firm. In addition, that profit deterioration will probably trickle down to producers supplying them with placement cattle, particularly stocker operators.
During the annual Cattle Industry Convention Feb. 1-5 in San Antonio, TX, analysts for Cattle-Fax, Lone Tree, CO, told producers that recent herd rebuilding would result in almost 850,000 more fed steers and heifers being available for processing and that a lot of beef from those cattle would need to be discounted in price to help spur its movement through the production system. Prices for fed cattle could even result in packers having an average margin of a negative $20 per head over the year, analysts indicated.
Randy Blach, CEO of Cattle-Fax, said cyclical nationwide beef cowherd liquidation was several years longer than normal and that the herd-rebuilding phase would carry more impact than has been shown in the past. USDA's annual Jan. 1 Cattle Inventory Report, released in late January, showed the nation’s beef cowherd to be a percent larger than the year earlier.
Because of that, U.S. cattle producers likely have seen the highest prices of this cattle cycle and could see declines for the rest of the decade, Blach said.
However, the longer-than-normal liquidation phase, the lack of access to export markets and last year marking the lowest steer and heifer slaughter since 1993 could lead to a significant decline in prices paid for fed cattle and deterioration of cattle feeding profits, Blach said.
“Now that the herd is beginning to grow again, steer and heifer slaughter is expected to increase about 850,000 head in 2005 with most of the increase coming in the second half,” he said. “Consumer demand for beef also could level out after seeing good demand growth over the last few years. Producers can't expect that growth to continue, especially at rates the past few years. Retail grocers already are seeing price resistance by consumers, and they are featuring it less often.”
Cattle-Fax indicated that average steer carcass weights could increase almost 10 pounds in 2005 compared with 2004. That could lead to the feeding industry losing currentness of market-ready supplies and eroding bargaining positions.
As a rule of thumb, every one pound of increase carcass weight produces the beef equivalent of about 1,000 head of cattle per week, he said.
Kevin Good, Cattle-Fax analyst, said producers should expect the low $70s per cwt to provide long-term support, with prices in the mid-$90s could offering strong resistance through probably 2006 or 2007.
However, it was stipulated that those predictions are taking into account the reopening of international markets to U.S. beef products.
Cattle-Fax projects the average fed cattle price to range between $82-84 during 2005, with a full range being mid-$70s during late summer to the low-$90s this spring. Prices are expected to rebound back into the mid-$80s later in the year.
In turn, profits for summer grazers are expected to be closer to levels seen prior to 2003 and 2004. Cattle-Fax analysts estimated that stocker operators would probably average about a $20 per head profit through 2005, significantly lower than profits of the past two years. Stocker operator profits during 2003 and 2004 ranged mostly between $160-170.
Good said it is imperative that costs be minimized, but that cattle still be produced to their maximum production potential. He said that more than two-thirds of the profit differences between high-return and low-return producers are simply the result of reducing costs.